There have never been so many ways to finance a small business.
This has meant more small businesses at different stages of growth are able to access the funding that’s right for them..
But with so much choice, how do you decide which funding type that is exactly?
This guide takes you through all your options, helping you make your own decision about which financing suits you best.
1. Revenue based finance
What is revenue based finance?
Revenue based finance sees lenders provide capital to a business in exchange for a portion of its future revenue. This small business finance option does not collect interest and repayment fluctuates with your monthly revenue, so you never owe more than you can pay each month.
Lenders decide to provide funding to businesses after looking at their back-end business tools (e.g. Xero, Shopify, etc). The data they pull allows them to invest in healthy businesses that are unlikely to default.
This funding type is quick and easy to secure. For example, Uncapped offers between $10k-$5m within 24 hours.
What can revenue based financing do for my business?
Revenue based finance is a great way to invest in things that reliably grow your business’s revenue. If you know you can quickly make money back from investing in ads or inventory, for example, then it’s a really quick and easy way to get hold of the cash you need to make that happen.
Revenue based finance providers typically won’t ask for a personal guarantee, won’t ask for interest, and won’t take equity in your business either.
When is revenue based financing not a good fit?
If your business doesn’t sell online, it can be difficult to secure revenue based financing. That’s because lenders like to see a clear picture of your cash flow.
However, merchant cash advances, revenue based finance’s predecessor, are a suitable alternative for businesses that don’t operate and sell online (like restaurants).
Or, if you do have an online presence but you plan on using the funds for something that takes longer to pay off (like research and development), then it might be best to look for another source of funding. Lenders of this type of small business finance want to be paid back quickly and reliably.
2. Small business loan
What is a small business loan?
Traditionally, a small business loan was issued by the bank. Though now it’s a pretty broad term and accounts for many different types of small business loans available. From term loans to working capital loans, there are so many small business loan products out there, it can be hard to keep up.
As a rule of thumb, you’ll be able to borrow between $50,000 - $500,000 over 3-10 years with a small business loan.
Why should I apply for a small business loan?
A small business loan can be a very quick, effective way to secure capital for your business. Because there are so many options out there, you’re likely to find a loan that fits your business goals and that you can qualify for.
Why shouldn’t I apply for a small business loan?
Small business loans usually come with a few strings attached. Depending on the type of loan you go for, lenders may want you to secure it against an asset, like your house. Plus, depending on how much your business wants to borrow, interest rates could rise quickly.
3. Your own savings
What Is It?
Not sure we have to explain this one, but here we go! The savings you have in your personal bank account could be invested into your business. How much or how little is up to you and dependent on what you have at your disposal.
Why should you dip into your own savings?
When first starting out, sometimes only the small business owners themselves believe in the future of their business. If you’re lucky enough to have capital in savings that you’re comfortable pulling from, you could invest it in your business. Often this type of small business finance goes towards creating an early prototype or paying for an office space.
It’s not ideal and it comes with risks, but it gets you off ‘Go’ and it demonstrates to potential angel investors — if you plan to go that route— that you’re serious about building your company from the ground up.
Is using your own savings a bad idea?
Spending your own money is fine if a) you have money to spend and b) it’s getting you to the next step. But it’s far from a long-term plan. Look for other funding sources as soon as you have a business plan in place and some early indications that your product will be a success.
4. Family and friends
What Is It?
Family and friends investment is —again— pretty self-explanatory. Instead of using your own savings, you’re tapping into the resources of your friends and family to help get your small business off the ground.
Unless your friends are really generous, they’ll offer this financing in the form of a business loan that you pay back over time or as equity in the business. The terms are up to you and them.
You’re only limited by the generosity and wealth of your family and friends.
Why should I turn to friends and family?
Raising money from family and friends should be less stressful than raising from other lenders. You’re able to set your own terms, which won’t be as restrictive as the bank.
Having the backing of friends and family is a small business finance option that is great when you’re just starting to lay out the foundations for growth.
When are friends and family a bad small business finance option?
It can be difficult to ask your family and friends for funding more than once, and you probably can’t ask for very much. So if you do go down this route, it’s best to raise these funds as early as possible and only from those who can afford to help your business.
Borrowing from people you know personally can also put a strain on your relationship, especially if you’re slow to repay them or your business struggles. It’s best to proceed with caution, and be completely upfront with the risk they’re taking.
What is crowdfunding?
Crowdfunding gives away equity in exchange for business funds. But instead of directly turning to a handful of investors, you’ll use a crowdfunding partner who connects you to an entire audience of investors. Crowdfunding platforms bring together hundreds, sometimes thousands of investors who each take a small cut of equity in exchange for funding.
Crowdfunding platforms often charge a 2-5% fee on what you raise.
Why should I crowdfund?
Crowdfunding investors are often very passionate about the business they’re investing in, meaning you can be more competitive in your equity offer. Most businesses also run big marketing campaigns to help them crowdfund, which is a great way to let more people know about your brand and become recognisable for your logo design.
And what better way is there to turn someone into a superfan than letting them own a part of your business?
What are the downsides of crowdfunding?
Crowdfunding can take a long time. You’ll need to build and grow an audience, and then drive potential investors to invest every time you raise. If you’re looking for a quick injection of capital to fuel customer acquisition, it’s probably not your best small business finance option.
6. Venture debt funding
What is venture debt funding?
Venture debt funding is an increasingly popular alternative to equity financing. It sees the company take a small business loan from venture debt lenders, who are often specialist banks.
If you use this finance option, you have to pay interest rates, a closing fee, legal fees, and cover the cost of warrants. All that can add up, so we’ve created a venture debt calculator to help you decide whether venture debt is the right option for you.
When is venture debt funding a good idea?
Taking venture debt means you won’t need to give away more equity. If you expect your valuation to climb, that can be very valuable. It’s also one of the only options available to businesses that need a large tranche of funding, and is often to extend runway or provide the funding needed to make acquisitions.
When is venture debt funding a bad idea?
However, venture debt funding comes with hidden costs. On top of interest, legal fees and processing fees, lenders can often buy shares from you at an agreed price within a specified time period, thanks to debt warrants.
Plus, if you fail to meet financial targets, your loan may default and become immediately payable in full.
7. Incubators and accelerators
What are incubators and accelerators?
Incubator programs help new startups find their feet. They often provide consultative services in addition to funding. Accelerator programs, on the other hand, give startups resources to help them scale up.
They’re often confused with one another, but because they come at different points in your small business’s journey it’s important to consider which is right for you.
Incubators and accelerators can offer as much as $100,000 in exchange for up to 10% of your small business.
Why should I apply for an incubator or accelerator program?
If you’ve never launched a startup before, incubator programs help you understand what it takes to build one from scratch.
Funding isn’t the only thing you’ll get either. You’ll also be introduced to mentors and a network of other founders who can help you grow your business from the ground up.
Accelerator programs give you a network of mentors to lean on too. They’ll help you access venture capitalists who can take your funding further when you’ve proven your business case.
Why wouldn’t I apply for aniIncubator or accelerator program?
Most small businesses are reluctant to give away so much equity in their business at such an early stage.
Those that choose to work with an incubator or accelerator see it as a worthwhile trade-off. Retaining ownership of a small business that won’t make it off the ground is more painful than giving up 10% of a small business that flies.
8. Research & Development (R&D) grants
What are R&D grants?
R&D grants are given by the government to businesses who are creating an innovative product or service. These grants are part of a bigger government program to support business sectors that show potential for significant growth.
What’s the best thing about R&D grants?
It’s free money! You don’t need to give up equity, you never need to pay any of it back, and you can apply for further grants when you run out.
What’s the worst thing about R&D grants?
It can take a lot of time to pull the application together, so if you don’t meet all of the criteria for grant allocation, it might not be worth applying.
9. Government grants
What are government grants?
R&D grants aren’t the only type of government funding available for small businesses. There are a range of others, including grants for businesses located in certain areas or businesses that work on reducing climate change.
Why should I spend time applying for a government grant?
Again, free money!
Why shouldn’t I?
Applying for a grant can take time, but other than that, we can’t think of a reason not to. If you can find the right grant for your business, you should go for it. Your accountant may be able to help you put the application together.
10. Angel investment
What are angel investments?
Angel investment is when someone, known as an angel, gives you capital in exchange for equity in your business. Angel investors make investments in early stage businesses they expect will grow significantly, and often receive tax incentives for doing so.
You can have any number of angel investors financing your small business, but remember that with each investor you are giving up precious equity.
Angel investor groups generally take between 20-50% ownership stake of early-stage companies in exchange for between $25,000 and $500,000.
What’s good about angel investments?
This is one of the more popular finance options for startups and scale ups due to the flexible terms. You can use the capital however you see fit, and there are no pressing repayments. Plus, angels are often entrepreneurs in their own right, so can advise you on different aspects of running your business.
What are the downsides to angel investment?
Individually, angels take a small cut of your equity, but together they make a significant dent. You’ll probably need to bring in a group of angels, and organising that can be tricky.
You’re also giving away a lot of equity at an early stage in your journey, so be sure to find terms that are right for you.
11. Venture capital
What is venture capital?
Venture capital (VC) is a type of small business finance that comes at a later stage than angel investment. It’s used to help a company take on a new market or challenge larger competitors.
It works best when you have product-market fit and are looking for cash to build out your team, your product, and your marketing efforts.
If you’re interested in the terms of this finance option you can head here for a breakdown of terms in Europe or here for a breakdown of terms in the US.
Why should I look at venture capital?
Building a business is expensive and sometimes you need a lot of capital all at once. When you’re in an industry where every other business around you is doing the same, that’s especially the case.
Why should I look elsewhere for funding?
Over the past twenty years, venture capital has been the go-to funding method for high-growth businesses. As its popularity continues to grow, so does resistance to getting funded with venture capital. The terms of deals are often punishing for young businesses, and it can take between six months and a year to raise a round. Ouch.
12. Growth equity
What is growth equity?
Growth equity, otherwise known as growth capital, is financing that late-stage companies use to grow the business. Like venture capital it can be used to grow the team and invest in building the product out, but it’s also commonly used to fund acquisitions and offer liquidity to existing shareholders.
Why should I go for growth equity?
Growth equity is a helpful way to get a firmer grip on your market and light a fire under your business’s growth.
So if you’re late to some new opportunities that a few start-ups in your space have already jumped on, this finance option can help you make a significant play to win market share. . For many businesses, it’s the next stage after venture capital.
Why should a small business stay away from growth equity?
Growth equity isn’t really for ‘small’ businesses. We’ve included it on this guide because, well, every other financing option is here, so it’s handy as a comparison.
From all the investment options that involve giving away equity, as a small business you’re more likely to opt for angel investment, venture capital investment or crowdfunding. But we know lots of small business owners like to think big, and you may not be small for long…
13. Merchant cash advance
What is a merchant cash advance?
A merchant cash advance is a type of small business finance which gives businesses an advance that they pay back as a portion of future revenue. It’s most popular in the hospitality and restaurant industries.
Merchant cash advance providers advance clients up to 6 months' credit and debit card turnover ranging between $5,000 and $500,000.
To pay the loan back, lenders deduct around 15% every day from your credit and debit card receipts.
What’s great about merchant cash advances?
If you’re a small business it makes sense to take an advance, particularly if you’re affected by seasonality. The advance can help you buy inventory, fund ads and build your team. So if your revenue growth is in any way predictable, this is a great, short-term way to bring in more cash.
What’s bad about merchant cash advances?
Merchant cash advances may not be for you if your business doesn’t have a predictable source of income. Financing against future sales can get expensive too, with some merchant cash advances charging a fee of up to 30%, paid off as a proportion of future sales.
14. Invoice factoring
What is invoice factoring?
Invoice factoring is a financing approach used by some businesses to get their invoices paid early. When an invoice comes in, it’s automatically sent to an invoice factorer who releases about 90% of the value of the invoice, and charges a fee for the service. This means you don’t have to wait up to 60 days - or more - to get paid.
Standard terms for invoice factoring typically ranges between 0.5-5% of the invoice’s value, with discounts applied for larger invoices.
What is the main advantage of invoice factoring?
The main benefit to small businesses is that they get access to cash that keeps their cash flow healthy, and means they can very quickly reinvest their profits back into their business - and make more.
What is the main disadvantage of invoice factoring?
The fees can be so high that they eat into your profit, so if you’ve got tight margins, this may not be the financing option for you. Additionally, the factorer will always approach you for any invoices that aren’t getting paid.
15. Startup loans
What are Startup loans?
Many banks and other finance providers offer startup loans to small businesses that were recently formed. These are like small business loans, but easier to get and the terms are a bit tougher.
You can expect to pay back a 6% fee on a loan of $500 to $25,000 between 1-5 years.
Are startup loans right for me?
Startup loans can be really handy. You don’t need to spend an age raising funds, and many lenders have dropped minimum turnover requirements and won’t ask for a trading history.
Is there a downside to startup loans?
You’ll need to offer some collateral to secure the loan against, so you’ll want to be pretty sure that you can pay it back! Since the APR on these loans are typically more expensive than small business loans, you’ll end up paying more.
16. Short-term loan
What is a short-term loan?
Short-term loans are used to cover funds for a short period of time, often between three months and a year. They include a number of different types of small business loans included in this guide, such as credit cards or overdrafts, but you’ll also be able to get one from the bank or another finance provider.
Their terms are similar to a startup loan, but you’ll need more trading history to successfully apply.
Why should I apply for a short-term loan?
Short-term loans are quick and easy to get a hold of. If you need cash fast, they can deliver.
Why shouldn’t I apply for a short-term loan?
Lots of small businesses tend to avoid short-term loans because the interest can be really high. They’re often seen as a last resort, and you could be personally liable for recovering funds if your business is unable to pay them back.
17. VAT loans
What are VAT loans?
A VAT loan sees small businesses call on a finance provider to pay their VAT bill on their behalf. They’ll then pay back the bill over the next 3-6 months, though repayment windows can vary. The interest rates for this small business loan usually sit between 1.25% and 1.5%.
Why are VAT loans worth it?
VAT loans are generally cheaper than small business loans, and span the same sort of timeframe, so they’re a handy stand-in.
Why are VAT loans a bad idea for my small business?
Although they’re cheaper than short-term loans, many require you to offer collateral. You might also struggle to borrow enough, because the capital will always max out at the cost of your VAT bill.
18. Credit cards
What is it?
When entrepreneurs open a bank account, they’ll often be given a business credit card with a low limit. Your small business can use that credit to fund purchases they wouldn’t be able to make otherwise, although this funding option is usually quite small.
If you max out lending (usually the roof is at about $1,200) you could pay between 20%-50% APR in interest.
Why should I fund my business with credit cards?
Credit cards are fairly low risk. Of course, you’ve got to pay them back, but the repayment rates are low and it’s unlikely that you’ll go more than $2,500 in debt.
Why shouldn’t I use a credit card?
The other side of the coin is that you can’t borrow much more than $2,500 before you’ll be looking for another source of funding again. Although credit cards can give your business a quick boost or a little bridge, they’re hardly a long-term solution.
What is an overdraft?
Overdrafts are often used by ecommerce and SaaS providers once they have six months of figures. You’ll usually
An overdraft will probably be capped at between 1.5 and 2 months’ turnover and, unless yours is a multi-million pound company, you probably won’t get more than $25,000.
Why should I take out an overdrafts?
Overdrafts are really handy. Though you shouldn’t rely on them too much, because they only offer a shallow safety net. On the other hand, it’s really helpful to be able to dip under your bottom line every once in a while.
Why shouldn’t I take out an overdraft?
Although they’re useful, overdrafts aren’t a great way to fund your business. You won’t be able to get more than one from the same provider, the bank can choose when to withdraw the facility, and it’s difficult to get more than $25,000.
20. Export finance
What is export finance?
Export finance is another way for businesses to free up cash by releasing funds from overseas transactions. Instead of waiting for these invoices to be paid, the capital is paid as an advance, with a small fee.
The fee is usually between 1.25% and 3% per 30 days.
Why should I look into export finance?
If you sell overseas, there can be a long period between releasing the invoice and getting paid. Getting the invoice paid up-front makes your business less dependent on being paid on time.
Why shouldn’t I consider export finance?
In most cases you’ll need to work with large volumes before a finance provider would consider offering you export finance. However, smaller finance providers have started to offer more flexible terms to reach a broader market.
21. Peer to peer finance
What is peer to peer finance?
Peer to peer finance does exactly what it says on the tin. Hosted by an online service, business owners get loans from other individuals. Interest rates are typically better for the lender and the borrower than traditional lenders like banks.
Borrowers will usually pay a fee of up to 6% for this loan.
Why should I turn to my peers?
Getting a peer to peer loan is a fast way to get funding, and borrowers get access to better rates than those offered by traditional lenders.
Why shouldn’t I?
The peer to peer sector took a hit during the Covid pandemic, and many providers are much more cautious about the loans they approve on their platform. A strong track record in business and a squeaky clean borrowing history are needed now more than ever.
22. Business finance for women
What is it?
Some financial institutions offer business finance specifically for female entrepreneurs. These are usually government backed to encourage more female founders to set up their own company.
The cost of this finance option can vary from being almost free to being the same price as a standard small business loan.
Why should I look into this option?
When you’re just starting out and you don’t have much of a track record, it’s not easy to convince the bank to give you a fair rate on a loan. By lowering the bar to access finance, these lenders help make entrepreneurship more accessible. Successful applicants may also receive business advice as part of the deal.
Why shouldn’t I apply for business finance for women?
These programmes can be bureaucratic, so it can take a long time for a decision to be made on your application for funding. If you need cash quickly, there are others on this list which might be better suited to you.
23. Asset-based lending
What is asset-based lending?
Asset-based lending helps companies improve cash flow by securing loans against the value of machinery, property or other assets owned by the business.
They can be a bit complicated, and there are several fees involved. This article does a good job of breaking those fees down.
Why should I consider asset-based lending?
If you have business assets such as inventory or equipment then this could be an option for you.
Of course, the more you’re able to provide as an asset, the more funds you’ll have access to.
Why shouldn’t I go with asset-based lending?
Ten years ago you’d struggle to find a way to fund your business that didn’t involve offering a personal guarantee as a security. Now there are many more funding options available, and not all of them require business owners to put their business assets on the line.
What is a Microloan?
Microloans are small loans that individuals offer, rather than banks and are hosted on the peer to peer platforms we covered on point 22 . Standard terms are between 6% and 30%, depending on the borrower’s level of risk.
What’s a good reason to get a microloan?
If you’re looking for a small injection of capital to help get your business off the ground, a microloan might be the best way to do it. Because you’re bypassing traditional lenders, you’ll get access to better rates.
Why shouldn’t I get a microloan?
Microloans have dipped in popularity since the Covid pandemic, mostly because the peer to peer platforms that host them are increasingly cautious about the type of business they’re prepared to lend to. Lenders are also looking to recover their investment as quickly as possible.
25. Cash flow loan
What is it?
Similar to revenue-based financing, a cash flow loan gives businesses access to funds based on their business performance. The loan helps businesses improve their cash flow and invest in activities that drive short-term growth.
They’re usually between 5-15%, with additional fees if your repayments are late.
Why should I get a cash flow loan?
Cash flow loans are a great way for businesses to get quick access to the capital they need to grow. Unlike traditional small business loans, it’s uncommon that you’ll need to secure the loan against your own assets too.
Why shouldn’t I get a cash flow loan?
You’ll need to put together a strong case for growth, which often means giving the lender access to the back-end of your financial systems. This gets more complicated when you don’t take payments online, so many lenders will only work with software or ecommerce businesses.
26. Supplier credit
What is it?
Supplier credit gives businesses access to goods and services without requiring them to pay for these immediately. Instead, the supplier offers the buyer a line of credit.
There are lots of different forms of supplier credit, some of them already covered in this article. See here for terms across the complete range.
Why should I go for supplier credit?
Supplier credit gives customers the option to earn from the items they’ve bought before they’ve paid for them, which means they can be more agile, and more resilient to supply chain disruptions.
It's a collaboration between both parties- one being you, as the borrower of the credit, and the other the supplier. Because of this you'll want to choose your supplier carefully.
Why shouldn’t I go for it?
It’s often hard for start-ups to get access to supplier credits, because suppliers will want assurances that the buyer will be able to pay them back quickly and reliably. Plus, businesses that miss repayments will face expensive debts.
So, how should you finance your small business?
Small business owners should finance their small business with low-cost capital.
However, low-cost capital means a different thing to different businesses.
If you’re running a fast-growing ecommerce business with low cost of customer acquisition, quicker access to funds at a slightly higher rate means - in relative terms - the capital is lower cost than, for example, waiting for a bank loan to be approved.
Different businesses will have different levels of access to capital, based on their industry, years trading, business performance, and appetite for risk, and any low-cost, low-risk funding option would be a good result.
Having said that, it’s worth taking your time to understand the different funding providers within each category too. The terms in this guide give an outline of what you can expect, and these can vary significantly between providers.
Best of luck in funding your small business!
At Uncapped, we offer investment capital with offers ranging from £100k to £10m through a revenue share agreement. See if you qualify!