Types of Business Finance

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Types of business finance

If you’re looking for flexible funding at a low cost, there are several types of business finance to choose from.

In its report on Small Business Finance Markets 2024, the British Business Bank revealed that 50% of small businesses now use finance, yet gross bank lending has fallen by 9%.

Fintech developments mean business owners are no longer limited to borrowing from traditional lenders with lengthy payment terms.

Choosing the right source of funds for your business will depend on where you are in your business journey. You may need more than one type at once, as it’s rarely a case of one-size-fits-all.

Read on to find out what types of financing are available and how you can use them to grow your business.

What types of business finance are there?

There are a variety of finance options available to fit the needs of businesses at each stage of their development.

If you’re an SME wanting to invest and grow, non-bank lending offers accessibility and quick decision-making.

Below, we look at the different types of financing to help you find the right fit for your business.

Business loans

These traditional term loans provide a lump sum of cash you repay in instalments over a fixed period. At Fleximize, we offer loan terms from 3 to 60 months.

Business loans are defined as secured or unsecured depending on whether collateral is required.

Unsecured loans are usually more popular because:

• You don’t have to offer high-value assets as security.
• They’re quicker to approve as there is no need for third-party asset valuation.

Though no assets are required to take out an unsecured loan, lenders will typically require you to provide a personal guarantee.

On the other hand, with secured loans:

• You can borrow larger amounts of money - up to £500K with Fleximize.
• You’ll almost always get offered lower interest rates as a result of offering security.

Offering collateral can help offset poor credit. Secured loans can therefore be a good option if you suspect past performance is limiting the amount of funding you are being offered by lenders.

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Revolving credit facilities

Like an overdraft, revolving credit allows you to borrow money as needed. Once it’s repaid, you can use it again.

This short-term finance option has a fixed interest rate, and repayments can be made daily, weekly, or monthly. Term lengths range from three months to two years. You also have the option to extend, subject to eligibility criteria.

Invoice financing

Invoice financing is perfect for firms with lengthy payment terms where restraints of late payments are limiting growth.

Invoice finance allows you to bridge the gap by borrowing against outstanding customer invoices for a fee. This helps to improve cash flow by giving you the funds before invoices are fulfilled.

• Invoice factoring allows you to borrow up to 90% of your invoice value. Lenders will manage your sales ledger and collect payments directly from your customers.
• Invoice discounting lets you maintain control of payments. This works similarly, but the funds are raised without your customers’ knowledge.

Asset finance

This type of business finance comes in two forms:

• Asset refinance is similar to a secured loan. Businesses borrow based on the value of their collateral assets, such as machinery or equipment. You can put forward partially owned assets up to the level of equity you have in them.
• Equipment finance involves borrowing to buy expensive business assets. This is split into hire purchase, which spreads the cost of repayments, and equipment leasing, where you rent the asset for a specific time period.

Merchant cash advance

Merchant cash advance is suitable for businesses that experience fluctuations in cash flow.

Using your card payment machine, the lender releases a sum of money to you upfront. You then repay with a percentage of your card transaction sales plus fees.

This type of financing is a popular choice for seasonal businesses such as restaurants and tourism enterprises. The percentage is fixed, but the amount will vary depending on revenue shifts. As a result, repayments will be lower during quieter months.

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Your common questions answered

What is business finance?

Business finance is the money your business needs to start, run, and grow.

It’s not unusual for SME business owners to have insufficient capital to meet all their company's financial needs. External sources are therefore invaluable for additional funding support.

A range of products are available as an alternative to traditional bank loans. From business loans to invoice finance, these give SMEs access to flexible financing.

As a non-bank lender, we understand it’s not a one-size-fits-all approach. Instead, we take the time to understand different businesses’ needs as you look to invest and grow.

Our Flexiloan is tailored to fit almost any business for any purpose, provided you’ve traded for 12 months or more. Meanwhile, the Flexiloan Lite is the perfect choice for companies in the early-stage growth phase who also need quick access to capital.

What are the sources of funds for businesses?

It's important to plan how you will finance your business activities during the early stages and for everyday operations. This includes covering costs such as rent, salaries, and utilities.

Sufficient funding is also essential for future growth initiatives and maintaining a competitive edge in the market.

Business funds typically fall into two categories:

• Internal funds. This is finance generated from within the business, such as capital, retained profit, or selling assets.
• External funds. These come from outside the business and can include loans or shares issued by the company.

What is debt finance?

Debt finance is the most widely used type of finance by UK businesses.

Businesses borrow a set amount and pay it back with interest over an agreed time period. This method is popular among small business owners. Unlike equity finance, it allows them to raise the funds needed to grow their business while maintaining control.

This is also a more affordable option, as interest rates are often lower than those of equity finance.

Examples of debt finance products include loans, overdrafts, and hire purchases.

How to fund a business

Getting any business off the ground is a challenge. Effective funding is key to turning your ideas into a reality.

Startup businesses can struggle when approaching banks, who are naturally wary of funding untested firms. This is where alternative finance comes in, as four in ten UK SMEs now prefer fintech lenders over mainstream banks.

Many SMEs turn to external sources for additional financial support. Popular uses include buying equipment and stock or even launching marketing initiatives.

Here are some possible options to help you launch and plan for growth:

• Reward crowdfunding
• Equity financing
• Peer-to-peer lending
• Unsecured loans
• Pension-led funding

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