External finance, from loans and overdrafts to asset leasing, equity and grants, lets you preserve cash reserves while funding growth or smoothing out seasonal dip. iwoca’s fully digital, flexible small business loans make tapping these external sources as quick and straightforward as possible.
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When your business needs funding to grow, develop or keep cash flow ticking over, you may be tempted to dip into your cash reserves. Looking beyond that pot, though, could be a smart move. Accessing external sources of finance lets you preserve what you’ve saved for emergencies and unexpected costs.
In this guide, we’ll explore what an external source of finance is, how it compares to internal funding, and which options might suit you best.
Whether you're experiencing some short-term cash flow troubles or planning your next big expansion, understanding your choices will help you make a confident, informed decision.
We’ll also show how iwoca’s small business loans (or a large business loan, if needed) can offer flexibility, speed and control that could make a real difference to your finances, providing funding without the faff.
An external source of finance is any funding that comes from outside your business.
This could include taking out loans, attracting investors, leasing equipment, or applying for grants. Essentially, it’s funding that doesn't come from your reserves or profits.
You might look to secure external sources of finance in lots of situations: when you’re ready to grow or expand, want to invest in technology, equipment or people to stay competitive, or to solve cash flow issues, especially when your internal funds don’t stretch far enough.
These sources of external finance can be short-term (like an overdraft) or long-term (such as equity investment), and they can be secured or unsecured depending on your needs and your credit profile.
As is usually the case in the finance space, you have a lot of choices when it comes to external sources of finance. Lenders, angel investors, the government and crowd funders can all offer injections of capital, with varying terms and use cases, depending on your business needs. Some of the most common include:
Each comes with its pros and cons – and we’ll explore those below.
Knowing the difference between internal and external sources of finance will help you decide which one fits your situation best.
Internal finance is generated within your business – think retained profits, money saved by reducing costs, or funds released by selling off assets. It’s interest-free and doesn’t involve third parties, but it’s often limited in how much it can provide.
External finance, by contrast, is brought in from outside. It can provide a much larger cash injection, but usually comes with costs like interest or expectations from investors.
So, when should you choose external over internal funding? It depends on your goals.
If you're trying to seize a growth opportunity, launch a new product or keep up with a busy period, an external source of finance can provide the scale and speed your internal funds can’t match.
Let’s take a closer look at some of the most common external sources of finance examples, along with a few innovative options that are changing how businesses access funding:
These options cover both short-term external sources of finance and long-term external sources of finance, so it’s all about matching the method to your moment, whether that's covering immediate costs or looking at growth capital.
As with anything in life, there are pros and cons to external funding. You need to weigh up these advantages and disadvantages of external sources of finance before you make your choice.
The major advantage is that you can typically access much larger amounts through a lender than what you can muster internally. At the same time, you can strategically deploy your cash reserves elsewhere.
The idea behind external funding is that it’ll help you accelerate your growth. And you’ll pay back the money owed by increasing revenue and getting more money coming into the business.
Advantages:
The main downsides include the risk of overcommitting to repayments and the cost of borrowing. Choosing the right structure, provider and repayment plan helps reduce that risk.
Some types of finance, like iwoca’s business loans, give you the benefit of flexibility and transparency – for example, you only pay for what you use and can repay early at no extra cost.
Disadvantages:
When choosing an external source of finance for a business, it's essential to match the type of funding to the time horizon of your need.
Short-term finance includes options like:
These products are ideal for covering a temporary cash flow gap or handling a one-off expense.
Long-term finance includes:
These products are more suitable for major purchases, expansion plans or structural investments.
Your choice should factor in how much you need, but also how quickly you can repay it, and how much flexibility you want. If your revenue is seasonal or unpredictable, for example, a flexible loan like an iwoca Flexi-Loan can give you room to breathe.
Lenders and investors want to see that you’ve got a solid business and a clear plan for the money. They’ll usually look at:
To boost your chances, have your documents ready: bank statements, financial forecasts and a simple explanation of what the funds will achieve.
At iwoca, we use real-time performance data – not just business credit scores – to assess eligibility. That means even if you’ve been turned down by a high street bank, you might still get approved with us.
Looking for alternative external sources of finance? You’re not limited to bank loans. There’s a growing number of flexible, digital-first options available, including:
iwoca offers external sources of finance that are tailored to small business needs – fast, flexible and fair. You can borrow from £1,000 to £1,000,000 in as little as 24hrs.
These alternatives may suit you better than a traditional bank loan if you need speed, flexibility or want to avoid complex paperwork.
There’s no one-size-fits-all solution, so how do you find the right external source of finance?
Start by thinking about:
If speed, flexibility and simplicity matter to you, iwoca is designed with exactly that in mind. Our loans are transparent, easy to manage, and tailored to how small businesses operate.
Looking for a fast, flexible external source of finance? Find out how iwoca’s business loans can help you fund your next step – with no hidden fees, no long waits, and no hassle.
