Having a great business idea, solid strategy or innovative products doesn’t guarantee success. In volatile times and a competitive market, you need sufficient financing to support ongoing operations and help you achieve sustainable growth.  

In this guide, we outline the main sources of business finance for UK companies and various funding options, including their pros, cons, use cases and suitability for different businesses.

Understanding the basics of sourcing business financing

Securing appropriate sources of business finance is crucial, whether from internal or external sources, equity investment or commercial lending. The right funding can help you cover key expenses, manage cash flow, purchase inventory and invest in new assets, staff and marketing activities, enabling you to maintain stability.

As your business (and its ambitions) grow, you’ll need to invest in new equipment, technology, infrastructure and people to improve efficiency and competitiveness, develop new products/services and enter new markets. 

Without sufficient finance, growth can plateau, and you might miss key growth opportunities or struggle to meet regular obligations.

The importance of adequate business financing

Adequate financing is not just about having enough money for now, as you need the resources to sustain operations, innovate and build momentum. Having sufficient business financing enables you to:

• Fund day-to-day operations
• Purchase inventory and raw materials, ensuring smooth production and timely delivery of products or services
• Invest in new assets and systems to enhance efficiency and competitiveness
• Seize growth opportunities, such as expanding into new markets, launching new products or acquiring competitors

Key sources of business finance 

In some cases, entrepreneurs and company owners can rely on internal sources of business finance, which don’t involve external borrowing or selling ownership, while others will need to seek external sources of business finance, such as investment, capital borrowing or grants.

Here’s an overview of the main internal and external sources of business funding:

Internal sources of business finance

• Retained profits
• Sale or lease of existing assets
• Owner funds and personal investment
• Working capital

External sources of business finance

• Business loans
• Lines of credit
• Revenue-based finance
• Asset finance
• Invoice/receivables financing
• Trade credit
• Peer-to-peer lending
• Trade finance
• Equity investment
• Grants or no-interest loans

Internal vs external sources of business funding: Comparison

There are various benefits to seeking finance from internal sources rather than external sources, and vice versa. We’ve created a handy comparison table of the pros and cons of internal vs external sources of business finance, shown below:

Considering debt vs equity finance 

If you’re seeking external sources of business finance, your first decision, before looking at different options and finance providers, is whether you want a debt finance or equity finance solution. They offer very different dynamics and funding models. 

Here is the difference between debt and equity finance in a nutshell:

• Debt financing involves borrowing money that must be repaid over time, typically with interest.
• Equity financing isn’t capital borrowing, as you receive investment from either individuals or firms in exchange for equity, in essence, a share of ownership, voting rights, rewards and future profits.

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There are advantages and disadvantages to both to consider. The main appeal of equity finance is that money doesn’t need to be repaid, and you share your risks with investors. However, you give up some control over your business. With debt finance, you retain control, but you need to ensure you make regular repayments and, in most cases, you’ll pay interest and other fees as part of the agreement. 

External sources of funding: Main types of business finance in the UK 

Let’s now look in detail at external sources of funding, as we outline the main types of business finance for UK companies and their key features, benefits, drawbacks and use cases:

Debt finance options

Business loans and lines of credit

A business loan is a broad finance category, as there are various loan types with different terms and repayment models. The main differentiators are the loan’s term length and whether it’s secured or unsecured: 

• Secured loans are usually longer-term options, primarily provided by banks, in which you must use business assets as collateral. 
• Unsecured loans are short-term loan solutions, which are faster to access, often through alternative and digital lenders, and don’t require collateral. 

You’ll agree on the borrowing amount, repayment schedules and interest rate before entering into a loan agreement.

With a business line of credit, providers offer an amount of credit from which you can draw down, as and when needed, repaying funds according to agreed repayment schedules. One of the big appeals is the flexibility, and that you only pay interest on the funds you actually use, rather than the full credit amount.

Key features

• Fixed repayment terms for loans
• Fixed or variable interest rates, depending on the lender and your situation
• Both can be secured (with collateral) or unsecured (no collateral required)
• Lines of credit allow flexible, revolving access to funds

Advantages

• Predictable repayment schedule (term loans)
• You can build your business credit profile with prompt repayments
• Flexible access to funds (with lines of credit and flexible business loans)
• With lines of credit (and certain flexible loans, like iwoca’s Flexi-Loans), you only pay interest and what you draw down

Disadvantages

• Secured loans often require a strong credit history and extensive financial documentation (slowing up applications)
• Interest and fees can be significant for shorter-term, unsecured loans, due to increased lender risks
• May require collateral or personal guarantees, depending on the loan type and lender

Use cases

• Business expansion projects
• Asset and equipment purchases
• Support acquisitions 
• Working capital needs and cash flow management (particularly short-term loans and lines of credit) 

Business credit cards and overdrafts 

Business overdrafts provide a temporary credit line, allowing you to withdraw more money than you currently have in your bank account, up to a pre-approved limit. 

Acting as a buffer when cash is tight or for unexpected expenses, overdrafts are a handy facility.  However, one of the main disadvantages for small businesses using an overdraft as a source of finance is that interest rates and fees can add up, especially in unarranged overdrafts (when going over agreed limits). 

Business credit cards give you regular purchasing power to manage expenditure and cash flow, options to spread the cost of key commercial purchases and, in most cases, access to benefits, such as cashback and offers.

Key features

• Short-term revolving credit linked to your business bank accounts
• Interest charged on outstanding balances 
• Various business credit card perks 

Advantages

• Immediate access to short-term finance
• Useful for managing day-to-day cash flow gaps
• Spreading the costs of key business purchases 
• Rewards programs and expense tracking benefits
• A regular way to build your business credit rating 

Disadvantages

• High interest rates on unpaid balances
• Easy to overuse or mismanage cash flow, which can build pressure and result in additional charges
• Relatively limited borrowing capacity for most small businesses 

Use cases

• Covering short-term expenses
• Plugging temporary cash flow gaps
• Regular small-to-mid-size purchases
• Emergency cash needs

Browse our guide to the best business credit cards for UK companies and top overdrafts provided by British banks.  

Invoice/receivables financing  

Invoice finance is a popular source of business funding for companies with lengthy payment schedules, seasonal demands and fluctuating cash flow. Providers advance the majority of your outstanding invoices’ value (often between 80-95%), transferring the rest (minus service/factor fees) once client payments arrive. 

There are two main types of invoice financing (factoring and discounting), with the main difference being that factoring providers take responsibility for chasing/collecting client payments. There are also selective invoice finance options available for more ad hoc funding needs.

Key features

• Borrowing funds against unpaid client invoices
• Discreet options for those wanting to retain control of invoice collection (invoice discounting)
• Recourse and non-recourse options, which determine whether you or the lender takes on the risk of client non-payment 

Advantages

• Unlocks working capital tied up in receivables
• Reduces cash flow pressure
• No additional collateral is required
• Enables fast access to funds (usually within a day or two)

Disadvantages

• Fees and interest can often be higher than many traditional loans
• In non-discrete options, some businesses worry about perception
• Relies on the creditworthiness of your clients
• Funding is only as high as your invoices

Use cases

• Supporting businesses with longer payment terms, especially in sectors like construction and hospitality
• Plugging seasonal cash flow gaps
• Covering bills, expenses and staffing needs in key periods
• Taking advantage of timely business opportunities 

Asset finance

Helping companies to spread the cost of hiring and acquiring a wide range of business assets and equipment, asset finance agreements come in many forms, from numerous providers. 

These include finance leasing, hire purchase and other arrangements with different repayment models, including options at the end of the term to purchase the asset, return it or renew the lease.

Key features

• Funds to purchase or lease physical assets, such as machinery, vehicles, tools and systems
• The agreements are often secured against the asset itself
• Usually involves an initial deposit, followed by regular instalments including interest payments

Advantages

• Preserves working capital for other operational needs
• Flexible hiring and leasing options for various needs and budgets
• Fixed repayments help cash flow management and budgeting
• Some options will offer various benefits packages, tax allowances or incentives, including EVs in vehicle financing

Disadvantages

• You may not own the assets until the end of the initial term, and in certain agreements, you’ll never own them (which can restrict use)
• Depreciation means assets may lose value
• Interest rates in some asset finance agreements can be relatively high
• Default on repayments may result in assets being repossessed

Use cases

• Purchasing or hiring equipment, vehicles, tools and technologies 
• Upgrading outdated assets or revamping premises
• Expanding business scope and meeting new demand
• Temporary vehicle needs, such as events

Revenue-based finance

In revenue-based finance solutions, funding is directly tied to turnover and sales performance. This includes merchant cash advances, which involve lenders providing a lump sum to be repaid as a percentage of future card sales. This allows businesses to access crucial working capital with repayments aligned with sales/cash flow.  

Key features

• Repayments are tied to an agreed percentage of monthly revenue
• No fixed repayment schedule or equity dilution
• A borrowing fee applies, expressed as a factor rate (usually between 1.1 and 1.5 of the advanced amount)

Advantages

• Repayments are aligned with business performance
• Can have faster approval than bank loans and more traditional lending, especially those provided digitally, say, within Amazon merchant financing or Shopify lending facilities
• Good performance can lead to further lending and better terms

Disadvantages

• Only suitable for businesses with consistent revenue streams
• Many revenue-based finance lenders have strict turnover and trading history eligibility thresholds
• Effective interest cost (factor rates) can be high

Use cases

• Online businesses and ecommerce stores
• Retailers needing additional working capital
• Seasonal funding needs to meet demands, such as staffing, inventory and promotional activities  
• Effective cash flow management

Peer-to-peer lending

One of the growing sources of business finance is funding that’s obtained through peer-to-peer lending (P2P) platforms. P2P lending is a form of debt financing that allows individuals and businesses to borrow and lend money without using an intermediary, such as a bank, although the platform helps facilitate agreements.

Key features

• Connecting borrowers directly with lenders (individuals or firms)
• P2P lending platforms act as an online marketplace for funding needs
• Includes features that ensure security, verify borrowers/lenders, conduct credit checks and provide marketing tools to users

Advantages

• Skips more formal applications and approval processes
• Provides relatively fast access to funding
• Offers flexibility over repayment terms
• Opportunities for lower borrowing rates than traditional sources of finance

Disadvantages

• There are platform fees to consider
• Pitching on these platforms is no guarantee of suitable lender matches
• You’ll often need a pretty good credit rating to attract most P2P lenders

Use cases

• SMEs seeking fast and flexible finance without going down traditional funding routes
• Property development and construction projects – P2P lending platforms can provide more bespoke offerings
• Businesses seeking to expand or purchase assets without using collateral
• Consolidating debt

Equity finance

Venture capital (VC)

Venture capital is a form of equity financing provided by investors or venture capital firms. These investors provide capital to businesses in exchange for an ownership stake and potential returns on their investment (ROI).

Venture capitalists typically invest in high-growth potential businesses, often in the early stages, and bring not only capital but also expertise, networks and guidance to help businesses succeed.

Key features

• Equity investment from professional investors in high-growth startups
• No repayment of capital is required
• Involves giving up a proportion of ownership and control

Advantages

• Entrepreneurs and businesses can access large funding amounts
• Investors bring expertise, business networks and mentorship
• No debt repayment obligations

Disadvantages

• Equity dilution and reduced control of your business
• Requires negotiation and giving up certain ownership, voting rights and decision-making
• Investors often have high expectations for fast growth and exit strategies

Use cases

• Tech and innovation-driven startups with ambitious growth plans
• Profitable businesses looking to scale operations fast
• Funding expansion into new regions, premises and product areas

Angel investors

Business angels, also known as angel investors, are individuals who invest their own capital into businesses in exchange for an ownership stake. They often support early-stage companies or startups, providing funds, expertise and mentorship.

Angels can bring valuable experience and industry knowledge, as well as new networks, to help businesses navigate key challenges and scale their operations.

Key features

• High-net-worth individuals investing personal funds for equity and ROI
• Early-stage funding focus
• Usually involves investors aligned with the company’s vision 

Advantages

• More flexible and accessible than VC
• Strategic advice and mentoring
• May invest in earlier stages than institutions

Disadvantages

• Loss of equity and possible control issues
• Smaller funding amounts than VC
• Investor alignment critical

Use cases

• Seed-stage businesses
• Prototypes
• Early market entry

Crowdfunding platforms

Crowdfunding has gained popularity as a means of raising capital through small contributions from a large number of individuals. Businesses can create pitches in crowdfunding campaigns to seek investment in exchange for rewards and equity, or simply to support a cause.

Using crowdfunding platforms as a source of business finance allows entrepreneurs and companies to showcase their ideas and projects to a broad audience, attracting investors, supporters and customers.

Key features

• Raising capital from numerous individuals online to reach a funding target
• Involves project pitches and funding deadlines
• If/when successfully funded, businesses are responsible for delivering rewards, incentives and communication on the use of funds
• Equity and a level of control are given up to investors in exchange for investment and support

Advantages

• Access to a broad investor base
• Gauging interest in your venture/products and getting market validation
• Increased exposure and community engagement
• No capital repayment is required 

Disadvantages

• It can be time-consuming to set up, including planning and executing the pitch and marketing your funding campaign
• On certain platforms, it can be an all-or-nothing situation if you don’t reach your funding target
• There is a reputation risk if you miss your intended target or responses are not overly positive 

Use cases

• Product or event launches
• Creative projects
• Early-stage ventures
• Innovative tech solutions seeking to build on initial funding and growth

Grants and other interest-free finance solutions

Government and commercial grants

Government grants are available to support businesses in specific industries, locations or for certain types of projects or initiatives. These grants don’t require repayment but are often subject to stringent eligibility criteria and application processes, and many are focused on particular regions or sectors.

Businesses can also seek grants from various sources to fund research and development, innovation, new initiatives or community-focused projects. 

Key features

• Non-repayable funds from governments, local authorities, NGOs or agencies
• Often targeted at specific sectors, types of products/solutions or regions
• May be provided to a certain number of organisations in specific funding windows

Advantages

• No repayments required or equity loss incurred
• Capital to apply in key areas without taking on debt or giving up control
• Boosts credibility and may support you when seeking other sources of business finance 

Disadvantages

• Highly competitive
• Time-consuming application process
• Strict eligibility criteria and documentation required

Use cases

• Sectors driving innovation
• Sustainability initiatives
• R&D projects
• Regional development and growth

Bootstrapping/personal savings and investments

A common internal source of finance is personal savings or investments from owners. Entrepreneurs often fund startups with their money, showing confidence in their venture and making it easier to attract future investors and talent.

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Using your own savings to start a business (covering rent, equipment, staffing costs, etc.) or expand operations demonstrates commitment while strengthening credibility when seeking future external sources of business finance.

Key features

• Using personal savings to start or grow a business
• Reinvesting other business profits to fund operations

Advantages

• Retaining full control and ownership
• No capital repayments required
• No investor obligations to meet

Disadvantages

• Potentially limited funding amounts available
• Growth can be slower and harder to achieve
• Personal finance is at risk

Use cases

• Early-stage businesses in testing phases
• Small businesses focusing on stability over growth
• Business owners who want to maintain independence and retain control

Trade credit agreements with suppliers 

A trade credit arrangement is where suppliers extend credit to businesses, allowing them to purchase goods or services and pay for them at a later date, typically within 30 to 90 days. 

One of the main advantages of using trade credit as a source of finance for small businesses is maintaining cash flow and managing their working capital effectively. However, it relies on good relationships with suppliers and ensuring regular payment within agreed timelines.

Key features

• Suppliers allow buyers to delay payment for goods and services rather than paying upfront, allowing the buyer breathing space to get revenue in.
• Can be supported intermediaries to facilitate agreements, or even reverse factoring (supply chain finance agreements), so both sides benefit.

Advantages

• Improves cash flow in key periods
• Frees up working capital 
• Provides a source of interest-free financing, if maintaining good supplier relationships

Disadvantages

• Limited by the value of the goods/services provided
• Relies on the willingness and credit terms of the supplier
• There is a risk of strained supplier relationships if payments are late

Use cases

• Retail, hospitality, manufacturing and construction sectors
• Wholesalers
• Other businesses seeking interest-free options to support cash flow

Retained profits

One of several internal sources of business finance, established businesses can reinvest retained profits (the portion of earnings not paid as dividends) to fund growth without taking on debt.

An advantage for a small business using retained profits as a source of finance is reinvesting earnings to hire more and better talent and technologies or boost marketing/advertising budgets. This can support long-term growth and allow you to scale at your own pace.

Key features

• Reinvesting net earnings back into the business

Advantages

• No cost of capital or equity dilution
• Demonstrates financial health and sustainability to future finance providers

Disadvantages

• Funding can be minimal, limited by your company’s profitability
• Restricting the scale of growth you can achieve
• Dividend payouts or reserves may be reduced

Use cases

• Funding steady growth and expansion rather than rapid scaling
• Supporting gradual operational improvements
• Risk-averse business owners who don’t want to take on debt or relinquish company control

Sale of assets

Another internal source of business finance is raising funds by selling unused or outdated assets, such as old equipment, surplus inventory or property.

Let’s take an example of a manufacturing company seeking to sell obsolete machinery when upgrading its production line. Proceeds can fund new equipment, staff, training or product diversification, which, in turn, improves operational efficiency and lets the business focus on core activities and growth strategies.

Key features

• Selling underused or legacy assets
• Restructuring existing debt to release funds (refinancing) 

Advantages

• Generates fast cash to use for various needs
• Enabling businesses to fund new assets to improve processes and boost service quality 
• Refinancing can reduce interest expenses and unlock better terms 

Disadvantages

• Can cause issues if assets are not replaced, upgraded or supplemented by investments that bring in greater value
• Potential loss of productive assets (if selling assets to cover urgent needs)
• Refinancing may just extend your debt obligations

Use cases

• Financing new investments and asset upgrades
• Improving liquidity and freeing up working capital for other purposes 
• Debt consolidation

How to choose the right source of finance

Given the wide variety of finance sources available for UK businesses, it’s important to match funding solutions to your business needs. We’ve outlined the main things to do before selecting a source of finance for your business and a suitable provider:

• Identify your key requirements – determine whether you need short-term working capital, long-term investment or funds for specific asset purchases.
• Establish your current financial health and future needs – this will help you understand which internal sources of finance you can leverage and what other funding you may need initially or going forward.
• Decide how much control and flexibility you need – this will guide your decision between debt and equity finance, and a suitable finance facility.  
• Weigh up the pros and cons of different sources of business finance – consider things like speed of funding, cost of borrowing, flexibility and timeframes for repayment (if debt finance).
• Compare typical rates and fees for prospective solutions – look closely at arrangement fees, interest rates and other costs of borrowing, or what you’d be giving up if you enter an equity investment agreement.
• Check eligibility – ensure your business meets the criteria for each of the financing options you’re considering, from credit scores and collateral requirements to turnover thresholds, sector focus and entity structure.
• Seek advice from financial advisers and accounts – guidance from experts can help you choose a suitable option and avoid costly errors.

By choosing the right finance option, you can ensure you can meet any debt or equity obligations while still achieving your growth goals.

Using flexible finance solutions to fund any business needs

Unless you need a dedicated finance solution for specific purposes, a flexible business loan can be a great option, providing significant short-term capital for a range of business needs, with repayment terms tailored to your cash flow.

At iwoca, we offer fast and flexible finance to fuel business growth. Iwoca’s Flexi-Loan is designed to meet the needs of UK SMEs. We’ve helped over 150,000 businesses to make key investments, manage cash flow effectively and support their expansion plans.

Benefits of our business loans:

• Apply online in minutes and get an approval decision within 24 hours
• Borrow between £1,000 and £1 million for a matter of days, weeks and months (up to 60 months)
• Use our loan like a line of credit and only pay interest on what you use
• Make early loan repayments free of charge and 

You can apply for an iwoca loan today or check out our handy business loan calculator to see your likely repayments.