7 Types of Business Financing: Which Is Right for You?
Choosing the right type of financing can have a lasting impact on your business’s growth, cash flow, and long-term success. With so many funding options available to UK SMEs — from traditional business loans to innovative alternative finance — understanding the differences is key.
In this guide from The Funding Group, we’ll walk you through 7 of the most common types of business financing used by UK companies, along with the pros, cons, and typical use cases for each.
1. Traditional Business Loans
Overview:
A business loan is a lump sum of money provided by a lender, which you repay over a set term with interest. These loans can be either secured (backed by an asset) or unsecured.
Best for:
General business growth
Equipment or stock purchases
Hiring staff
Managing cash flow
Pros:
✅ Fixed repayments make budgeting easier
✅ Doesn’t dilute your equity or ownership
✅ Available from banks and alternative lenders
Cons:
❌ May require good credit or personal guarantees
❌ Can be harder to secure for startups or seasonal businesses
At The Funding Group, we help match businesses with over 100 UK lenders offering both secured and unsecured loans — with terms from 6 months to 10+ years.
2. Invoice Finance
Overview:
Invoice finance allows you to unlock the value of unpaid invoices by advancing you a percentage (usually 80–90%) of the invoice amount. The lender is repaid when your customer pays.
Best for:
B2B companies with long payment terms
Improving cash flow
Growing businesses waiting on large invoices
Pros:
✅ Improves working capital without taking on debt
✅ Grows in line with your sales
✅ Reduces pressure from late payments
Cons:
❌ Can be more expensive than a standard loan
❌ Only works if you issue invoices to other businesses
Invoice finance is particularly popular in construction, recruitment, and logistics — and we work with lenders who understand your industry.
3. Merchant Cash Advance
Overview:
This is a flexible funding option where you borrow a lump sum and repay it through a fixed percentage of your future card sales. The repayment adjusts with your revenue.
Best for:
Retail, hospitality, or ecommerce
Seasonal businesses
Quick access to short-term funds
Pros:
✅ Repayments flex with your cash flow
✅ No fixed monthly payments
✅ Fast approval (often within 24–48 hours)
Cons:
❌ Higher cost than traditional loans
❌ Only available to businesses that take card payments
The Funding Group can help you access merchant cash advances from trusted providers — with clear pricing and no hidden fees.
4. Asset Finance
Overview:
Asset finance allows you to spread the cost of buying equipment, vehicles, or machinery. This includes hire purchase, equipment leasing, and refinancing of existing assets.
Best for:
Purchasing expensive equipment or vehicles
Upgrading technology or infrastructure
Preserving working capital
Pros:
✅ Spreads the cost over time
✅ Often secured against the asset itself
✅ Can include maintenance or upgrade options
Cons:
❌ You may not own the asset until the end of the term
❌ May be tied to specific suppliers or conditions
Whether you need a new van or manufacturing equipment, we’ll guide you to the most competitive asset finance offers for your needs.
5. Startup Loans
Overview:
Backed by the UK government, startup loans offer new businesses unsecured funding (up to £25,000 per founder) with a fixed interest rate and business support included.
Best for:
New businesses with little or no trading history
Entrepreneurs launching for the first time
Sole traders and partnerships
Pros:
✅ Fixed 6% interest rate
✅ Free business support and mentoring
✅ No early repayment penalties
Cons:
❌ Personal credit history is considered
❌ Limited to businesses under 3 years old
At The Funding Group, we help startups navigate the application process and secure funding to kick-start their journey.
6. Venture Capital (VC)
Overview:
Venture capital is equity investment provided by firms in exchange for a stake in your company. VC firms typically invest in high-growth businesses with strong potential for return.
Best for:
Tech and innovative startups
Fast-scaling companies
Businesses with ambitious growth targets
Pros:
✅ Large funding amounts available
✅ No debt or monthly repayments
✅ Strategic support and industry connections
Cons:
❌ You give up equity and decision-making control
❌ Very competitive and selective
❌ Lengthy due diligence process
If you're preparing to raise VC funding, we can help you get investor-ready with pitch deck support and access to early-stage investors.
7. Angel Investment
Overview:
Angel investors are individuals who provide capital in exchange for equity. Unlike VC firms, angels often invest their own money and get involved earlier in your journey.
Best for:
Early-stage or pre-revenue businesses
Founders seeking mentorship alongside funding
Disruptive or niche industries
Pros:
✅ Flexible terms and smaller investment rounds
✅ Investors often bring valuable experience
✅ Can open doors to future funding rounds
Cons:
❌ Requires pitching and strong personal branding
❌ Potential for ownership dilution
❌ Finding the right investor can take time
We connect promising entrepreneurs with angel networks that understand their sector and offer more than just capital.
💼 How The Funding Group Can Help
At The Funding Group, we make it easier for UK businesses to find and secure the right finance for their unique needs. Whether you’re a startup launching your first product, or an established company looking to scale, we help you cut through the noise.
Here’s how we support you:
100+ lenders and investors: From high-street banks to niche finance specialists and investors.
Expert matching: Our smart tools and experienced brokers match you to the most relevant options.
Fast and simple process: Submit one application and compare tailored offers without affecting your credit score.
Honest advice: We’ll help you understand what you’re signing up for — no jargon, no pressure.
🤔 Which Option Is Right for You?
Here’s a quick comparison to help guide your decision:
Financing TypeIdeal ForRepayment TypeOwnership ImpactBusiness LoanGeneral use, growthFixed monthly paymentsNo dilutionInvoice FinanceB2B with unpaid invoicesCustomer repays lenderNo dilutionMerchant Cash AdvanceRetail, seasonal cash flow gaps% of card salesNo dilutionAsset FinanceEquipment/vehicle purchasesLease or HP agreementsNo dilution (eventual)Startup LoanNew businessesFixed paymentsNo dilutionVenture CapitalHigh-growth, techEquity shareOwnership dilutionAngel InvestmentEarly-stage, mentorshipEquity shareOwnership dilution
🧠 Final Thoughts
The right funding can unlock the next phase of your business journey — but only if it fits your goals, cash flow, and growth plans.
Before applying, ask yourself:
What am I using the finance for?
Can I afford the repayments (if any)?
Do I want to keep full ownership or share equity?
How soon do I need the funds?
At The Funding Group, we simplify the process and do the heavy lifting for you — saving you time, money, and stress.
Whether you need £5,000 to manage cash flow or £500,000 to scale fast, we’re here to help you secure the funding that works best for you.
