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Small business financing options

Starting and funding your business can be daunting. There are so many things to consider: employees, workload, business growth, customer care. So, in this blog, we’ll look at what finance options are available.

Small business funding options

There are many options available for funding a small business.

So here’s a list of some finance options to consider when setting up a small business:

  • Family, friends, and savings
  • Bank loans
  • Non-bank loans
  • Business grants
  • Angel investors
  • Venture capitalists
  • Crowdfunding

This list is by no means exhaustive. It is, however, a good place to start when researching methods of funding a small business.

Business loans vs business grants

Startup business loans and business grants are two of the most popular ways to fund a small business launch.

The main difference between a business loan and a business grant? A grant doesn’t need to be paid back. A loan does.

Grants and loans can come from various sources such as:

  • Banks
  • Private companies
  • Trusts
  • Local governments, or;
  • Sometimes family and friends.

Traditionally, grants are usually issued by local governments. Loans are often provided by banks, private investors, or family and friends.


Although grants do not need to be paid back when funding a small business, there are often conditions on how the grant can be used. Local authorities often stipulate that a grant can only be used for funding certain types of operations and in certain locations. Grants have no financial risk for the new small business. But the market for grants is highly competitive.


Loans are issued with certain payback criteria that must be met.

But remember:

  • A business loan will have a timescale for making payments including interest payments.
  • Loans are often issued against business collateral, such as property or equipment which the lender will take if the borrower does not pay back the debt.
  • Business loans are more flexible in terms of what they can be used for.
  • There is, however, far more financial risk involved.

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Bank loans vs non-bank loans

Bank loans are provided by financial institutions with a full banking licence. Non-bank loans when funding a small business are provided by financial institutions. These are covered by fewer regulations.

Since the 2008 financial crisis, banks have seen increasingly strict regulations imposed on their lending capacity.

This has enabled alternative financial institutions to ‘fill the gap’ in the market.

This also means they can offer small business finance to companies unable or unwilling to accept a bank’s terms and conditions.

In brief, bank loans are now harder to obtain. There are far stricter checks required. This can be time-consuming and less accessible. Non-bank loans on the other hand are more readily available. And far quicker to set up.

Non-bank lenders are more likely to take higher risks than traditional banks. This has made them popular with small business start-ups. However, they often charge higher interests. This means they are more expensive in the long term.

Local government funding

There are numerous funding schemes available through local government. Many of these are focused on the renewable energy sector. Grants are available for boiler upgrades, solar panels, and other energy efficient home improvements.

These schemes are popular with gas engineers, plumbers, and heating specialists. They are, however, focused on helping homeowners and existing tradespeople. For local government funding to help with setting up a small business, the competition is fierce.

Many of the schemes are only available in certain areas. And have strict criteria that must be followed to obtain the funding. Have a look through the government website to see what’s available in your area.

Applying for business grants

When applying for a small business grant it’s important to do as much research as possible. Firstly, you need to find the best, most relevant grants for your small business. Next, you need to have a comprehensive business plan to convince the grant provider that your business idea is a good one.

When creating a business grant proposal, it’s worth considering the following points:

  • How does your business meet the grant qualifying criteria?
  • How will you use the grant if successful? Be concise, detailed, and accurate.
  • Create aims, goals, and criteria to measure success.
  • Provide evidence on how you will succeed. This can include past experience, skills, and qualifications.
  • Create a clear and specific budget

Whether you’re applying for a business grant through a government scheme or a private investor, it’s essential to always be professional and confident in your interactions with the funder.

Alternative forms of finance

Traditional financial loans or grants are not suited to all small businesses. Fortunately, there are several alternative forms of finance available today for new small businesses. When starting your own small business, it’s worth considering the following options.


Crowdfunding has become increasingly popular in recent years. Small businesses can use crowdfunding platforms to seek financial support for their new business. Crowdfunding is usually separated into two types:

  • Reward crowdfunding – Small businesses seek investment through non-financial rewards. An investor may receive a free product. Or marketing as a reward for their investment.
  • Equity crowdfunding – These platforms let small businesses pitch to potential investors. Potential investors can then offer finance in return for company shares.

Equity crowdfunding is particularly popular with small businesses. They can benefit from financial investment. And real business growth through shareholders who may bring business experience to the company.

Angel investors and venture capitalists

Angel investors are shrewd business people who help start-up businesses with financial support. They also offer their business knowledge and can play an instrumental role in business growth.

The similarity between venture capitalists and angel investors

They are similar – but their key difference is that they are usually part of a larger corporation. They are usually more likely to invest in an already established company. However, there are exceptions to this.

Both angel investors and venture capitalists offer finance in return for equity. They play a hands-on role in business development and can often achieve great success.


How much can you borrow to start a small business?

Small business loans range from anywhere between £1,000 to in excess of £500,000.

What is a good interest rate for a business loan?

According to 2022 research across various providers, average interest rates on business loans are between 4% and 5%.

How long does a business loan or grant take?

A business loan or grant application can take anything from two to three weeks to several months to complete. This will depend on the monetary amount, complexity, and availability of evidence.

What financing option is best?

Grants are the most sought-after form of funding as they do not need to be paid back. Loans vary from lender to lender and the best for a small business will depend on the expectations of the business owner.

What is an average loan repayment period?

A typical loan small business loan repayment period is three to ten years. In some cases, small business loans may be taken out over a period of up to 25 years.

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