How to get small business finance

6 min read
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You have to spend money to make money. The problem is, if you’re just starting out, you probably don’t have enough money to spend.

This is where business finance comes in. Whether you’re looking for a bank loan, support from venture capitalists or just something to top up your cash flow, this article will help you learn what you need to know to get up and running when you’re starting a business in the UK.


Precisely how you raise cash will depend on a variety of factors, including the nature of your business, the state of the market and your personal financial circumstances.

In general, though, you can split sources of funding into two categories: loans and private equity.

Let’s start with loans.

Government loans

Government loans are a great way to raise capital for your business.

First, they’re backed by the government, helping to add legitimacy and security. Second, they have clear eligibility criteria: you must be 18 or over, living in the UK and starting a UK-based business that’s been fully trading for less than two years.

The basics of a government-backed start-up loan are as follows:

  • You can borrow between £500 and £25,000. 

  • You are charged a fixed interest rate of 6%. 

  • You must repay the loan in full within five years.

Government-backed loans in the UK are also unsecured, meaning you can get access to the cash without needing to put up assets to secure the loan.

As with all the other options on this list, though, you’ll need to prove you can be trusted and show your business can succeed.

Bank loans

Providing money you need now in exchange for money in the future is quite literally the reason banks exist. If you can demonstrate that you’re creditworthy and that your business idea is likely to be profitable, a bank can provide some serious cash to get you up and running.

To help convince the bank, you’ll need a top-notch business plan with a detailed breakdown of not just what you intend to do with your business but how you intend to do it.

It’s also worth looking at the different types of loan on offer.

Different banks will offer different fixed or variable interest rates, as well as different repayment terms.

Shop around so you know what’s out there and make sure you can prove to the bank you’ll be able to repay them.

P2P lending

If you’re struggling to get a bank loan, or even if you just feel like looking at alternative sources of funding, you can take advantage of the growing market for P2P loans.

‘P2P’ or ‘peer-to-peer’ loans are loans not from big organisations like the government or banks but from your ‘peers’: other entrepreneurs, investors and consumers who want to support your business.

There is a slight wrinkle, though. Peer-to-peer lending almost always takes place through an intermediary network that provides a platform to match those who have money to invest with those who need it.

This approach, also known as ‘crowdfunding’, usually involves getting small amounts from many lenders.

Benefits include:

  • lenders who are more sympathetic to the realities of running a business 

  • favourable repayment rates compared to banks 

  • less red tape 

At the same time, you should study the terms and conditions of your chosen platform carefully.

Funding Circle, for instance, requires your business to have been actively trading for at least three years. This might make it better suited to those seeking support to grow and expand than those just starting out.

Most platforms will also take some sort of flat fee on investment. Keep a close eye on this and make sure it doesn’t counteract the benefits of lower interest rates.

Family and friends

Finally, you can seek financial support from those close to you.

This obviously works best if your friends and family have a significant amount of cash on hand, but don’t think this is just for those lucky enough to be surrounded by wealthy people – it’s far more common than you might think for budding entrepreneurs to borrow from personal connections.

Friends and family are likely to offer far more lenient loan conditions than commercial lenders. They want to see you succeed, so they’re not going to hit you with an exorbitant interest rate.

Of course, that doesn’t mean you should treat loans from friends and family any differently than you would loans from any other source. You still need to be clear about the terms and repay on time and in full.

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Make sure you go in knowing the following:

  • Precisely how much are you borrowing?

  • What, if anything, does your lender expect in return for their loan?

  • How much interest will they charge you?

  • By when do you need to have completed repayments?

If you’ve ticked all those boxes, though, you can gain a lot from having friends and family invest in your business – especially as they’re likely to know you and your business idea already without you having to convince them as you would a bank.

Private equity

The second of the two main types of funding is private equity.

As a general term, private equity refers to all forms of funding where you sell a stake in your business to an investor.

The main difference between equity finance and loans is in the distribution of risk. Where loans must be repaid in full whether or not your business succeeds, equity investors share in both your profits and your losses. In exchange, they usually take some sort of role in your business’s development, either making important decisions with you or approving and vetoing decisions you’ve made.

The pros of private equity include:

  • less risk

  • no repayment 

  • assistance in developing your business

 The cons of private equity include:

  • shared decision-making 

  • potential for investors to undervalue your company in private negotiations

As with loan providers, you’ll need to convince investors that your business will make money before you can secure private equity financing. See our helpful guide for more details.

Angel investors

Before we finish, we should note one distinct type of private equity investor.

An ‘angel investor’ is simply a wealthy individual who puts their own money up to develop a business early in the business’s life.

Think Dragons’ Den and you’re more or less there.

 There’s a range of ways to get access to angels, including:

  • reaching out on LinkedIn 

  • asking other business owners to introduce you 

  • attending events that angels will be going to 

  • using angel syndicates or investment platforms

Angel investors can be an especially good example if you want someone to act as a mentor in your early stages. 

As you can see, there are many options when it comes to business finance. As always, you need to consider those options carefully and pick the one that is right for you. Remember, though: you don’t need to be tied to just one source of funding. Many of the best businesses secure start-up capital from a variety of sources.

Are you ready to roll?

Our guide to starting your own business in the UK can tell you exactly where you’re at in the process of starting your own business, ensuring that you don’t miss out on any of the essential steps. Complete the questionnaire to get a personalised to do list sent directly to your inbox.


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