Which Funding Source is Best to Grow your Small Business?

All small businesses will need funding at some point in their journey. Whether it’s for start-up support or an injection of cash to help an existing business grow, you have a variety of sources of loan or funding to choose from.

02 Mar 2022

All small businesses will need funding at some point in their journey. Whether it’s for start-up support or an injection of cash to help an existing business grow, you have a variety of sources of loan or funding to choose from.  

But the question is, which is right for your small business?

Perhaps you’re looking to invest in equipment to grow your business, expand your workforce, or even refinance existing business debt. Whatever the reason, choosing the right funding source isn’t always easy. From business credit cards to Government funding, here’s a rundown of ways to access capital  and when they might be the right option for your business.

Traditional banks

Banks are probably the first place that comes to mind when you think of sources of loans. Traditional financial institutions offer a straightforward funding option for many small businesses. 

There are two main types of funding traditional banks offer.

Business loans

Business loans from banks typically have higher values, and the monthly repayments are set out from the beginning. However, approval requirements can be stringent and can take a while, so they’re not always ideal for time-critical funding needs. 

And that’s if your business gets approved in the first place. It’s estimated that around 100,000 small businesses looking for funding are rejected by UK banks each year.

Business overdrafts

An overdraft facility on your business bank account is a useful safety net for short-term cash flow issues. But, like personal overdrafts, there are often extra fees involved for going into an overdraft.

Government-backed Start Up Loans

A government-backed Start Up Loan is actually an unsecured personal loan of between £500 and £25,000. As well as the loan, successful applicants get business guidance, including business plan support and mentoring, but you must meet certain criteria to qualify.

Alternative lenders

There are a variety of alternative lending sources, and while they often have higher approval odds and other benefits, they may also have higher interest rates, collateral requirements, and minimal customer support.

Peer-to-peer lending

P2P lending platforms connect small businesses with a number of investors that come together to make up the total amount needed. They could be other businesses, or they could be private individuals. The funding is typically unsecured and easier to be accepted for, but you’ll often pay a fee to the platform and interest rates can be high.

Equity investing
Angel investors

These are private individuals who invest in return for an equity stake in your business. They're more likely to take risks on an investment than traditional lending sources, and there's often no obligation to pay the money back if a business fails. As they're often successful in business themselves, it can be a valuable opportunity for mentorship and support as well as the funding.

Venture capitalists

VCs usually invest large sums of money into start-ups or small businesses looking to grow, because they see growth potential. The amounts we’re talking about are typically much higher than, for example, angel investors. But with higher capital comes higher risk, so they’re likely to ask for more equity in return, as well as more control over business decisions.

Crowdfunding

Crowdfunding campaigns, done via specialist crowdfunding platforms, allow lots of individuals to invest in your business idea. In return, you can choose to offer either equity in the business or rewards for their investment. It may come with fewer obligations and lower risk, but it can be difficult to plan around, so it’s harder for you to make projections.

Business credit cards

Business credit cards are flexible and generally easier to be approved for than business loans. Depending on the provider you choose, some, like Capital On Tap, have flexible payback options and great customer service, making it a more beneficial longer-term option for business funding.  You can also benefit from benefits such as cashback on all your card spend.

Business lines of credit

Similar to other forms of business loans, you may be wondering how a line of credit works. A line of credit is where small businesses are given a certain amount of credit which they can draw from when needed. This can make them very flexible, but they often come with higher interest rates, and are easy to overuse or abuse. Because a Capital On Tap credit card offers the ability to draw down cash up to your credit limit, sending it straight to your bank account it acts as a line of credit as well as a credit card.

Working capital loans

Working capital is a measure of your organisation's financial health, and it specifically reflects the amount of money funds needed to fulfil your daily financial obligations. To calculate your business’ working capital, subtract current assets less current liabilities.

A working capital loan is a shorter-term (up to 12 months) loan for small businesses, used to cover day-to-day spending, or working capital. 

This type of financing is fast to arrange, but is costlier than other sources of loans. Furthermore, working capital loans are often secured, meaning the amount you can borrow is dependent on the value of your organisation’s assets.

The type of funding you ultimately decide on will depend on your business’s circumstances at the time. Different funding sources may suit your needs at different times, but understanding what’s available to you is important. If you’re looking to grow your small business in a flexible, affordable way, a business credit card from Capital On Tap could be the answer.

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