Business finance guide – detailed comparison of UK business borrowing options

Last updated on 10 August 2023

Are you a business leader or entrepreneur in the UK looking for an easy and effective guide to finance? Worry not, because we’ve got you covered! This article will outline some of the crucial aspects of running a successful business in the UK, from getting a business bank account to understanding types of loan.

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With our content at hand, it’s never been easier for entrepreneurs to take charge of their finances and turn their business dreams into realities. So what are you waiting for – let’s go through all the essentials needed for finance success today!

Video: Business loans and finance explained

What is business finance?

Business finance is a term that refers to the money and credit used by businesses to purchase goods and services, pay for day-to-day operations, grow their companies, or invest in new projects.

It encompasses all forms of financing available to business owners, including loans, investments, equity financing, venture capital, crowd funding and other sources.

What are the most common types of business finance?

  1. Bank accounts – Bank accounts provide businesses with a reliable way to manage their finances.
  2. Business loans – Business loans are one of the most popular forms of financing for businesses, and come in the form of term loans, lines of credit and overdrafts.
  3. Credit cards – Credit cards can be used to finance short-term purchases or investments, but should generally be used with caution as the interest rates are high.
  4. Equity financing – Equity financing involves selling part ownership stake in a business to an investor in return for capital.
  5. Debt refinancing – Refinancing is the process of taking existing debt and restructuring it to obtain better terms and payment plans.
  6. Merchant cash advances – A merchant cash advance works by providing a business with an upfront sum of money in exchange for a portion of future credit card sales.
  7. Factoring – Factoring is when a business sells its accounts receivable at a discount to raise funds quickly.
  8. Mezzanine financing – Mezzanine financing is a type of private equity investment used by businesses that have already exhausted other forms of financing. It combines debt and equity investments to help companies finance their growth.
  9. Asset finance – Asset finance is when a business takes out a loan against an asset such as real estate or inventory.
  10. Venture capital – Venture capitalists invest in companies they believe have significant potential to grow and become more valuable over time.
  11. Crowdfunding – Crowdfunding is a form of Internet-based fundraising that allows businesses to raise money from many small investors by pitching their ideas online.
  12. Government grants – Government grants are funds provided by the government for specific purposes such as research and development, job creation and infrastructure development.

Business bank accounts

A business bank account is an essential tool for any business. It allows businesses to securely store and manage their money, make and receive payments, access credit services and track transactions.

Explore business banking

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ANNA Money
✓ Apply in 10 minutes
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Co-Op Business Banking
✓ Business Current Account
✓ Online, App & High Street Banking
✓ Quick & Easy Application Process
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HSBC Business Banking
✓ Business Current Account
✓ In-Branch, Online & App Banking
✓ FSCS Protected
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Metro Business Banking
✓ Business Current Account
✓ High Street Presence
✓ FSCS Protected
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Mettle Business Banking
✓ Business Bank Account
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Monzo Business Banking
✓ Business Current Account
✓ Dedicated mobile app experience
✓ FSCS Protected
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Virgin Money
✓ Business M Account
✓ In-Store, Online & App Banking
✓ Insights & Forecasting Platform
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Business bank accounts come in a variety of forms, including current accounts, savings accounts and deposit accounts. Current accounts are the most commonly used type of business bank account and are used to manage day-to-day finances. Savings accounts can help businesses grow their money over time, while deposit accounts offer higher interest rates than current accounts but require larger deposits and longer lock-in periods.

Businesses also have access to a range of online services such as online banking, mobile banking and digital payment systems for managing finances on the go. These services can help businesses track their finances and make payments quickly and securely.


Business loans

A bank loan is a type of financing offered by banks and other lenders to businesses. It may be in the form of a term loan, line of credit or overdraft, and is typically used for working capital, operational costs and expansion projects.

Term loans are lump sum payments made to a business that must be repaid over an agreed period of time, usually with interest. They are typically used for larger investments such as equipment purchases or property expansions.

A line of credit is similar to a term loan, but the funds may be accessed at any time up to a pre-determined limit. This type of financing can be useful when businesses require cash flow flexibility as they don’t have to borrow the full amount at once.

An overdraft is a type of loan that allows businesses to temporarily exceed their bank account balance and withdraw more money than is actually in the account. This type of loan can be risky, however, as it carries high interest rates and fees if not managed correctly.


Credit cards

Credit cards are a form of revolving debt that allows businesses to access funds as needed. Businesses can typically apply for a credit card with their bank or other financial institution and receive a predetermined line of credit, usually up to a certain amount.

The company can then use the card to purchase goods and services as needed and pay off the balance over time. The interest rate and fees associated with credit cards can vary, so it’s important for businesses to shop around and compare different offers before applying.

Credit cards are a convenient way for businesses to access funds without having to take out a loan or give up any ownership in the company. They can be used to finance everything from everyday purchases to large investments, as long as the card’s balance is kept within its limit. However, it is important for businesses to use credit cards responsibly and pay off their balances in full each month in order to avoid any additional fees or interest charges.


Equity financing

Equity financing is a form of financing whereby a business sells part ownership stake in the company to an investor in return for capital. This type of financing allows businesses to access funds without taking on any additional debt, but also reduces their overall ownership stake in the company.

The most common types of equity financing are venture capital and angel investing. Venture capital firms typically provide large sums of money to start-ups and other businesses with high growth potential. Angel investors are wealthy individuals who provide capital to businesses in exchange for a share of ownership in the company.


Debt refinancing

Debt refinancing is the process of taking out a new loan to pay off one or more existing loans. It typically involves taking out a larger loan and using the proceeds to pay off a number of smaller loans with higher interest rates. In some cases, debt refinancing may also involve consolidating multiple debts into one larger loan with a lower interest rate.

Debt refinancing can be a great way for businesses to manage their debt and reduce their interest payments. It can also provide them with access to additional funds, allowing them to finance other projects or initiatives. However, it’s important for businesses to carefully consider all their options before refinancing and make sure that the new loan is affordable and meets their needs.


Merchant cash advance

A merchant cash advance is a type of financing that provides businesses with an upfront lump sum payment in exchange for their future credit and debit card sales. The business will then pay back the loan, plus interest, over time by deducting a portion of their daily credit and debit card sales.

This type of financing is ideal for businesses with seasonal or fluctuating cash flow, as the repayments are based on their daily card sales. It also provides them with quick access to funds when needed and does not require collateral or any other form of security.


Factoring

Factoring is a type of financing whereby businesses sell their accounts receivables (invoices) to a third party for an upfront lump sum payment. The factor will then collect the payments from the business’s customers and pay the remaining balance, minus any fees and interest, back to the business.

Factoring is ideal for businesses that need quick access to cash but may not be able to secure traditional forms of financing. It also reduces their risk by allowing them to receive immediate payment for their invoices and eliminates the need to wait for customers to pay back their debts.


Mezzanine financing

Mezzanine financing is a type of loan that combines features of debt and equity financing. It typically consists of an upfront lump sum payment from an investor, known as the mezzanine lender. In exchange for their investment, the lender receives ownership interest in the company, usually in the form of preferred stock or warrants.

Mezzanine financing is often used to finance a company’s expansion, acquisitions, or new projects. It allows the company to obtain capital without giving up any ownership or control and can be especially helpful for companies that are unable to secure traditional bank loans. However, the lender may require repayment of the loan within a predetermined timeframe or they may be entitled to a portion of the company’s future profits.


Asset finance

Asset re-financing is a type of financing that involves taking out a loan to purchase assets, such as equipment or vehicles. The assets serve as collateral for the loan, meaning that if the borrower defaults on their payments, the lender can take possession of the assets.

Asset re-financing is ideal for businesses that need to upgrade or replace their existing equipment or vehicles but may not have the cash available to do so. It also allows them to keep their existing capital and credit lines open for other uses, such as inventory purchases or working capital.

As with any form of financing, it’s important for businesses to carefully consider their options before committing to an asset re-financing agreement. They should make sure that the loan is affordable and meets their needs and that they understand all the terms and conditions of the agreement.

Additionally, they should ensure that the assets they are purchasing with the loan will increase their profitability and not simply become a financial burden.


Venture capital

Venture capital is a form of private equity investment typically used by companies that have already secured other forms of financing. It provides businesses with the capital they need to grow and become more valuable over time, in exchange for giving up a portion of ownership in the company.

Venture capitalists typically provide advice and mentorship to their portfolio companies as well as large sums of money. They are looking for companies with high potential and will typically invest in them at a later stage when they have proven their product or service’s viability.

In exchange for the risk taken by the venture capitalist, they typically receive equity in the company, a portion of future profits, and a seat on the company’s board of directors. This gives them a say in the company’s management and direction.


Crowdfunding

Crowdfunding is a way for businesses to raise money through small contributions from a large number of people. It typically involves creating an online campaign and using social media and other platforms to attract potential investors.

Businesses can use crowdfunding to finance everything from product development and marketing expenses, to expansion projects and research & development costs. The funds are typically provided in exchange for a reward, such as a stake in the company or a product sample.

Crowdfunding has become increasingly popular over the past few years and is often used by start-ups and other small businesses that may not be able to secure traditional forms of financing. However, it can also be used by larger companies looking to raise additional funds for specific projects or initiatives.


Government grants

Government grants are funds provided by local and national governments to businesses for specific projects or initiatives. They are typically used to finance research & development, technology upgrades, expansion projects, and other activities that benefit the greater public good.

In order to qualify for a government grant, businesses must typically demonstrate that their project will benefit the public in some way. They must also meet the specific criteria of each grant program, which may include providing detailed information about their project and demonstrating that they have the necessary resources to carry it out.

Government grants are typically awarded based on a competitive process and can provide businesses with the funds needed to pursue projects and initiatives that would otherwise be too expensive or risky for them to undertake. They are a great way for businesses to access funds without taking on additional debt or giving up any ownership in the company.


What are the advantages of seeking business financing?

Business financing can help you get the resources you need to start or expand your company. It is an important way for businesses to manage cash flow and access capital needed to fund growth.

Additionally, it provides a valuable opportunity for business owners to build their credit score and open up the possibility of future investment opportunities.

What are the risks of getting business financing?

While business financing can be a great way to secure the resources needed for growth, it also carries with it some risks.

Borrowing money to fund a business venture can put you under financial strain if you are unable to repay your loan on time.

Defaulting on debt
Additionally, taking out too much debt without proper planning and budgeting could lead to overspending and put you at risk of defaulting on your loan.

It is important to ensure that all financing decisions are made with a full understanding of the potential risks and rewards associated with them.

What features to look for from a business finance provider?

When looking for a business finance provider, it is important to consider the following features:

  • Quick access to funds: Some providers can offer same day or next day funding options.
  • Flexible payment terms: Look for providers that can adjust repayment schedules based on changing cash flow needs.
  • Low cost financing structures: Compare interest rates, fees and repayment terms to ensure you are getting the best deal.
  • Transparency: Make sure that all relevant information is provided in a clear and straightforward manner so you understand exactly what you are signing up for.
  • Accessible customer service: Ensure your provider has knowledgeable staff who are available to answer questions and provide assistance when needed.
  • Tailored solutions: Look for a provider that can offer customised financing solutions to fit your business’s needs.

Ultimately, the success of your business depends on finding the right finance provider who you can trust and have confidence in. Taking time to research providers and compare options will help you find the best fit for your business.

How does a business qualify for financing?

In order to qualify for financing, businesses must meet certain criteria. This can include having a good credit score and a solid business plan, as well as providing financial statements, tax returns and other documents that demonstrate the soundness of their operations. Additionally, lenders will typically require business owners to personally guarantee any loans they take out, which means they are responsible for repaying the debt if the business fails to do so.

It is also important to be aware of potential risks associated with taking on financing. It is essential to carefully consider all aspects of a loan agreement and understand the terms before signing any documents.

The importance of research
Doing your research ahead of time will help you make an informed decision about which type of financing option is best for your business.

Business finance can be a complex and confusing process, but having the right knowledge and resources can make it simpler to navigate. With the right information and support, you can find the best financing options for your business and ensure it has the resources necessary to reach its goals.

What factors impact finance eligibility for a business?

The factors that impact finance eligibility for a business can vary from lender to lender, but typically include credit score, financial health of the business, type of industry/sector, and amount being requested. Credit score will play a large role in determining if you qualify for financing or not. Lenders use credit scores as an indicator of how likely the borrower is to pay back the loan. Financial health of the business will also be taken into consideration – lenders want to make sure that the borrower can afford to repay the loan.

Type of industry/sector is another factor that may impact eligibility, as some industries are considered higher-risk than others and may require more stringent criteria for approval. The amount the business is requesting can also affect eligibility – lenders may be more cautious with larger loan amounts. It is important to remember that each lender will have different criteria and requirements for financing, so it is important to do your research and compare options before applying.

Common mistakes to avoid when seeking business financing

When looking for business financing, it is important to be aware of potential mistakes that could cost you time and money.

  • Not researching lenders thoroughly: Rushing into a loan agreement without taking the time to research providers can be a costly mistake. Make sure you compare rates, fees and repayment terms before committing to a lender.
  • Ignoring personal credit: Your personal credit score will factor into your loan eligibility, so it is important to pay attention to your credit score and be aware of potential risks.
  • Failing to create a detailed business plan: A comprehensive business plan is an essential part of the financing process, as lenders need to understand how the money will be used and how the borrower intends to repay it.
  • Not having enough collateral: Many lenders will require collateral for a loan, so make sure you have the necessary assets secured ahead of time.
  • Not being organised: Being organised can help speed up the financing process and make it easier for lenders to review your application quickly. Make sure all documents are filled out correctly and that all financial information is up to date.
  • Not considering other options: Make sure you explore all financing possibilities before settling on one option. You may be able to find a better rate or more flexible terms with another lender.

In summary, there are many types of business financing available, and it is important to do your research before applying for any type of loan. Consider all factors such as credit score, financial health of the business, and collateral when looking for financing options. Make sure you are well organised and have a detailed business plan in place to present to lenders. Finally, don’t forget to explore all financing possibilities before committing to one lender. With the right knowledge and resources, you can find the best financing option to help your business succeed.

Good luck in finding the best financing options for your business!

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