Sources of business finance: 6 ways to fund your start-up

Looking to fund your start-up but not sure where to begin? We've compiled a quickfire comparison of six popular sources of finance for small businesses

Come up with a killer business idea? Check! Put all the groundwork in place? Check! Get the money to fund it? …This is where entrepreneurs tend to hit a roadblock.

Thankfully, there are plenty of financial options available to start-ups who are looking to fund their growth. Here, we explore six of the most popular sources of business finance available and how you can go about getting them.

Additionally, you’ll find business finance compared in the table below – click the links to learn more!

Sources of business finance Pros Cons
Business loans Plenty of options available, you don’t have to give away equity Potentially high interest rates, businesses with poor credit may struggle
Small business grants A cash award that doesn’t need to be repaid Hugely competitive, with arduous application processes
Invoice financing/factoring An easy way to get cash fast when in need of working capital You may be subject to high fees
Rewards-based crowdfunding You’ll drive public awareness and attract early fans/ambassadors Backers likely won’t offer business support, giving out freebies may take a toll
Equity crowdfunding You’ll drive public awareness and attract experienced investors/mentors You’ll have to give away equity
Angel investors You’ll benefit from the experience and connections of the investor You’ll be required to give them equity
Bootstrapping Fosters innovation and creativity, you won’t lose equity or have fees/repayments You may find having constricted funds difficult and limiting to growth


1. Business loans

Perhaps one of the most popular sources of finance for a business, a business loan is a sum of money borrowed from an organisation in order to fund your business’ growth.

As with all loans you’ll be required to pay it back, along with interest – but you won’t have to give up any equity to the organisation. You’ll also need to undergo stringent credit checks and present a detailed business plan to the lender.

Before deciding which loan to apply for, make sure you understand the difference between secured and unsecured loans, and consider – realistically – how much you’ll need to borrow and how long it’ll take to pay it back.

Secured loans require you to have assets you can sell if you can’t keep up repayments, whereas unsecured loans don’t – but they do need you to have a promising track record.

Where can I get a business loan?

As well as banks and building societies, you can also seek out loans from:

Government initiatives. Government-backed firms such as The Start Up Loans Company – which lends between £500 and £25,000 in an unsecured loan – aim to make it easier for entrepreneurs to get going.

Peer-to-peer lending platforms. Defined as ‘alternative finance’, online peer-to-peer lending platforms like Funding Circle enable businesses to borrow money from investors quickly and on a flexible basis.


2. Small business grants

One of the more competitive sources of funds for businesses, start-up business grants are effectively cash awards, given to new businesses or entrepreneurs looking to fund a start-up concept. Often, you won’t be required to pay interest on grants – or pay them back at all.

Offered by the government, the European Commission, local authorities, universities and organisations such as charities (check out our guide to the grants available), grants are most often awarded to businesses who are improving lives, innovating a particular sector or contributing to the economy.

How can I get a small business grant?

Unsurprisingly, grants are highly sought-after and competition for them is fierce. As a result they’re notoriously difficult to obtain.

Grants tend to have strict eligibility criteria, so narrow down your search by finding ones that you’ll be eligible for. Factors impacting this will include your business’ purpose, where it’s based, and its size and age.

You can find more advice on how to beat the competition and secure a grant in our detailed guide to applying for a business grant.


3. Invoice financing or factoring

A speedy way to get cash into your business while you’re waiting on payments from customers or clients – and a good way to alleviate the headache caused by late-paying customers – invoice factoring and invoice financing are similar processes which operate in different ways.

Invoice factoring

Invoice factoring involves selling unpaid invoices (also known as receivables) to a financial company.

Usually within 48 hours, the company will pay you a bulk portion of the money owed on the invoice (known as a cash advance). The financial company itself will collect payment from the client, then pay you the remaining money (known as the reserve), minus the fees they charge for their services.

Read our detailed guide to invoice factoring here.

Invoice financing

Rather than selling your unpaid invoices, invoice financing enables you to borrow money against them.

While waiting for an invoice to be paid, invoice financing enables you to borrow a bulk amount of the invoice’s value from a financial company, and receive it as a cash advance. Once your client pays you, you’ll be required to pay the money you were lent back.

When deciding whether to factor or finance, you’ll need to consider various factors such as fees, flexibility and whether it’s important to you that your business takes customers’ payments directly.


4. Crowdfunding

An increasingly popular source of business finance, crowdfunding entails posting a business pitch online and encouraging members of the public to pledge money to the start-up.

On many crowdfunding sites, backers can invest as little as £10 in a business, so campaigns have the potential to attract thousands of backers. It’s a great way to drum up public interest and even secure brand ambassadors.

Crowdfunding can largely be split into two different types:

Rewards-based crowdfunding

In this, businesses offer rewards – such as a discounted pre-order, freebies or an invitation to a launch event – in return for a pledge. The larger the pledge, the better the reward.

The obvious benefit here is that you don’t have to give away equity; but if you’re looking for experienced investors who’ll help you grow, this isn’t the route to go down. Many backers will simply be laymen who want your product.

Well-known rewards-based crowdfunding platforms include Kickstarter and Indiegogo.

Equity crowdfunding

Conversely, equity crowdfunding businesses offer investors an equal share of an equity stake.

While you do have to give away a portion of your business, your investors will be more inclined to actively support you – after all, they’re looking for ROI. You may well encounter angel investors here.

Seedrs and Crowdcube are popular platforms in equity crowdfunding.

How do I go about crowdfunding?

The steps involved in setting up a crowdfunding campaign include:

  • Choosing which platform to use: Different platforms present different rules, regulations and opportunities.
  • Setting your funding target: Too high, and you may not reach it (some platforms won’t enable you to take home any of the money if this happens). Too low, and you may need to raise again, wasting time and resources.
  • Marketing: Advertise the campaign well, putting the opportunity in front of the public and your target investors.

For more tips and insight, check out our crowdfunding hub.


5. Angel investors

Angel investors are high-net-worth individuals, often with extensive business experience, who can provide capital early in a business’ life – in exchange for a portion of equity (they will want a return on their investment!).

Many will also act as mentors, using their experience and connections within a particular sector to propel the start-up’s growth.

One of the more publicised sources of finance for businesses, if you’ve watched the BBC’s Dragons’ Den, you’ve seen angels in action.

How do I find an angel investor?

It’s very unlikely that an angel will notice your business from afar and reach out to you. Finding one yourself is all about being proactive:

  • Attend events that angels will be going to. Take your business cards and prepare a short elevator pitch that explains your business’ concept.
  • Reach out to angel investors on LinkedIn.
  • Ask other business owners to introduce you to the angels they’re connected with.
  • Research angel syndicates (networks of angels who invest together in the same businesses) – they tend to run pitching events which you can apply to join.

Remember, research is crucial to finding the right angel investor. Many will stick to investing in the sectors they have most experience in, so look into their investment portfolios, websites and social profiles to find out whether your business is one they’d be interested in.

For more advice, check out our feature on how to find angel investors for your start-up business.


6. Bootstrapping

Of course, business funding is by no means easy to come by. If you’re finding it difficult to obtain – or you’re otherwise not tempted by any of the above sources of business finance – you might decide to bootstrap your start-up.

A bootstrapped business is one which takes in no external funding: rather, the founder starts it up with their own personal finances, and reinvests the business’ revenues into growth and development.

In facing roadblocks where spending money can’t be the answer, you’ll find that you’ll adopt a more innovative mindset, coming up with unique and sustainable solutions and methods.

How can I bootstrap successfully?

When bootstrapping, you’ll need to be as lean as possible – there’s no room to splurge on television ads or hire a team right off the bat.

Instead, focus on what you can achieve with limited funds; such as running social media campaigns, using freelancers and renting (rather than buying) equipment and premises.

It’s far easier to bootstrap a business that can, by its nature, be launched and ran with very little capital.

Check out our list of 10 small business ideas that can be started on a shoestring, and our collection of start-up guides for businesses that’ll cost less that £10,000 to get going.

In summary, the key sources of business finance are:

  • Bootstrapping
  • Loans
  • Grants
  • Reward-based crowdfunding
  • Equity crowdfunding
  • Invoice financing or factoring
  • Angel investors
  • Venture capital

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  1. lucyw@startups.co.uk
    Edit profile

    Thank you for your comprehensive comment. We have tried to include most of the below but as it’s a signposting article it was created as a launchpad to direct people to different funding areas of the site where they can find out more about all the different options available to them. I’m sure readers will also find your list very helpful though.

  2. I am not too sure who this article is aimed at, but in any case it is not very comprehensive or that useful.

    Here is my list, which is a more comprehensive list for entrepreneurs/small business teams considering the range of funding options available to them.

    1. Self – consider putting in your own funds first. Most investors and banks would expect a contribution from the business owners up front. If you really believe in your business and you have plenty of equity in a UK property, taking out a secured loan/mortgage may be a very realistic option of obtaining needed cash for your venture.

    2. Friends and family – when your own funds are limited and the business is new/early stage, one should also consider friends and family as an additional source of additional funding. It can be quick and much simpler than most of the other forms of capital.

    3. Bank – yes, debt funding is the next obvious source, whether a bank over draft or a longer term fixed loan. This may not be easy for those business in the very early stages without providing a bank with some sort of guarantees.

    4. Professional introductions – these can come in many forms but the most obvious one is using the contact of your accountant. Many accountants have clients who are seeking investment opportunities and your business could be a useful fit for one of your accountants clients.

    5. Bartering – essentially this if offering something that you or your business can provide another party. In return they provide you with something of equal value. Typical example is providing XX months accountancy services to an advertising agency. In return they provide xx months free marketing/advertising services. Typically your bartering partners are business partners and associates who offer quid pro quo deals and arrangements to help you secure services or even fixed assets needed for your business.

    6. Business angels and other professional investors, or even angel groups/teams. Plenty on this web site about this kind of capital raising.

    7. Venture capital – depending on your venture, its stage of growth, this may also be an option. Venture funds have changed considerably over the years and there are many more these days. They also vary a great deal in the amount they will consider investing. They are a lot more approach able these days than in the past.

    8. Crowd funding – not only for raising funds for equity, but now there are crowd funding sources willing to lend funds too – check out Nicola Horlick’s new crowd sourcing (debt) venture.

    9. Invoice funding/factoring – as detailed in the main article. Available from your principle bank but there are also plenty of specialist.3rd party companies offering this kind of working capital funding.

    10. Sale and lease back financing – very useful if you have an asset containing a lot of equity. Again your bank, accountant or other specialist 3rd parties can provide a lot of useful information about this kind of medium/long term funding option.

    11. Leasing of capital equipment – not only vehicles can be obtained for the business using leasing. Machinery, computer equipment and other capital assets can be obtained through a capital lease with only a small deposit. Helps to free up your capital to use as working capital in your business.

    12. Grants and other government incentives – as above.

    Hope this helps.