Small business funding: How to choose the right type for you

Small business funding: How to choose the right type for you

Posted: Thu 8th Feb 2024

Whether you intend to start, have recently started or are actively growing your business, there are funding options to help you realise your ambitions.

Below, we look at the range of finance options currently available to small businesses and explain how to go about deciding between them.

Finding the right finance for you

The right option isn't always easy to find. First, you have to consider whether the funding matches not only your needs and goals, but your type of business too.

Do you have card terminals, for example? Do you operate in a market with potential for high growth? Do you need funding to buy an asset for your business, such as equipment or a vehicle? Or are you simply looking to get your idea off the ground?

Second, you need to shop around and, in certain circumstances, be able to negotiate. You must:

  • know your figures inside out

  • be able to provide accurate financial projections

  • inspire confidence in lenders or investors (which is why you must also know how much you need).

This process becomes easier with Enterprise Nation's Access to Finance tool, which presents small business owners with appropriate funding solutions tailored to their circumstances. Before exploring it, though, it's worth familiarising yourself with the various types of finance out there.

Debt finance

Start Up Loans

Government-backed Start Up Loans are designed for people who want to start or grow a business.

You can borrow between £500 and £25,000 at a fixed yearly interest rate of 6%. And because Start Up Loans are unsecured, you don't need a guarantor or have to put forward any assets as security. You'll also receive 12 months' free mentoring and help with writing a business plan.

To be eligible, you must:

  • live in the UK

  • be at least 18 years old

  • have (or intend to launch) a business that's been trading for no more than three years

Whether your application is successful will be based on your business's viability, your ability to repay your loan, and your creditworthiness.

You repay a Start Up Loan over a period of one to five years. If you want to pay the money back early, there's no additional fee.

Small business bank loans

It's tempting to see the bank as your go-to source of finance. You may have a relationship with them already, and their products are reasonably simple.

Small business loans are undoubtedly convenient – provided you're approved for one at a competitive interest rate – but there are three things for you to bear in mind.

  • Is the loan secured (against something like your home)?

  • Is the interest rate variable (which may make long-term financial planning harder)?

  • What if the bank is unwilling to lend to your early-stage business?


An overdraft is worth considering if you need relatively little capital to get your new business up and running.

If you use your overdraft a lot, the interest rate may be higher than if you received a loan. Remember, also, that banks are entitled to demand you repay the borrowed money immediately. If you're setting up a limited company, you may also have to give some personal assets as security.

Quick business loans

A quick business cash loan (or short-term business loan) is an option when you need a fast injection of cash. Covering a short period – normally up to 12 months – they're quick to arrange, with interest rates typically ranging between 20% and 40%. Lenders will assess your application based on your ability to repay the loan.

Flexible line of credit

This is essentially a flexible loan – similar to an overdraft, but not linked to your bank account. A line of credit is a sound option if your business has a good credit history (and healthy balance sheet) and requires access to credit as and when it needs it. Typical facilities range from £1,000 to £100,000.

To be eligible, your business must have been trading for a year and have a turnover of at least £40,000. You simply pay interest on the money you've drawn.

Invoice finance

Small businesses often experience cash-flow problems while waiting for invoices to be paid. With invoice finance, a funding provider will offer to pay up to 90% of your outstanding invoices – usually within 24 to 48 hours – in exchange for a fee. To apply, businesses must turn over at least £40,000 a year.

Merchant cash advance

If you own a business with card terminals and know what revenue you can expect in the future, a merchant cash advance is a flexible alternative to a traditional bank loan.

Typically, you can borrow up to 100% of your monthly card sales. Rather than make regular monthly repayments, you only start repaying when you receive card payments from your customers.

Asset finance

Growing companies that need to acquire expensive new assets like equipment, machinery or vehicles often don't have the cash to do it.

With asset finance, a lender funds the assets you need in exchange for regular repayments, and the loan is secured against the equipment. Depending on the type of asset finance you arrange, once all of the regular repayments are made you may own the asset outright.

Equity finance

Angel investment

A business angel is usually someone with an entrepreneurial background who invests in start-ups they believe have real potential. In return, they normally take a stake in the business of up to 20%.

Aside from the funding, which often stretches to the tens of thousands, businesses that take on angel investment also benefit from the investor's knowledge, experience and advice.

Venture capital

Venture capitalists invest vast sums of money into rapidly expanding businesses. They typically look for three things:

  • Companies with sound management

  • A market that's either very large or growing quickly

  • The likelihood that they'll make large profits in three to four years

They normally want ordinary shares in return for their investment, as well as a position on your board.


There are three types of crowdfunding: equity-based and peer-to-peer lending – which are overseen by the Financial Conduct Authority – and reward-based, which remains unregulated.

Equity crowdfunding

Particularly suited to fast-growing start-ups, you'd generally use equity crowdfunding to raise funds of £50,000 or more.

A number of experienced investors, from venture capital firms to angels, put money into your business in return for a stake.

Peer-to-peer lending

Also known as debt-based crowdfunding, peer-to-peer lending works like a bank loan – with the money coming from investors, who earn money on the loan's interest, rather than take equity.

Peer-to-peer funding is suited to growing start-ups that don't want to give up equity.

Reward-based crowdfunding

The most popular type of crowdfunding, reward-based is where everyday people pledge a certain amount in exchange for some kind of reward.

It's a great method for new start-ups, as there are no investors to convince. You will, though, need to persuade lots of people to believe in your idea – which is an effective way of testing the market.


Funding Hub: Access personalised finance options

Looking for finance for your business?

Personalised finance options for start-ups, small businesses, sole traders and freelancers. Take the Funding Hub tool and get recommendations tailored to your financial needs.


Also in this series:

Enterprise Nation has helped thousands of people start and grow their businesses. Led by founder, Emma Jones CBE, Enterprise Nation connects you to the resources and expertise to help you succeed.

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