Small business funding: every option explained

Small business funding in the UK has changed dramatically in the last ten years. A decade ago, your main option was a bank loan. Today, there are merchant cash advances, revenue-based finance, peer-to-peer lending, government-backed start-up loans, angel investors, and more.

The challenge is not finding funding. It is finding the right funding. Each option has different costs, speeds, eligibility requirements, and repayment structures. This guide breaks them all down so you can make an informed decision.

Merchant cash advances for small businesses

A merchant cash advance gives your small business a lump sum of capital, typically between £10,000 and £500,000. You repay through a small percentage of your daily card sales, meaning there are no fixed monthly payments.

For small businesses that take card payments, this is often the fastest and most flexible route to funding. Applications take about 60 seconds, decisions come within 24 hours, and funding arrives within 48 hours.

The cost is a single fixed fee agreed upfront. It never changes. There are no hidden charges, no compounding, and no penalties for early repayment. Because the provider only performs a soft credit check, your credit file is not affected by applying.

This option works particularly well for small businesses with variable income. If you have a quiet week, your repayments are lower. If you have a great week, you repay more and clear the advance faster.

Government-backed start-up loans

The Start Up Loans scheme is a government-backed programme that offers personal loans of up to £25,000 to individuals starting or growing a business that has been trading for less than 2 years.

The fixed interest rate is 6% per year, and loans are repaid over 1 to 5 years. You also receive 12 months of free mentoring and support. The application process is more involved than a merchant cash advance and typically takes several weeks.

Start-up loans are worth considering if you are in the early stages of building a business and can commit to fixed monthly repayments. However, they are not suitable for established businesses or those that need funding quickly.

Bank loans for small businesses

Bank loans remain an option for small businesses with established trading histories, good credit scores, and the ability to provide security. Rates can be competitive, particularly for lower-risk businesses.

The main drawbacks are speed and flexibility. Applications involve extensive paperwork, business plans, and financial projections. Decisions can take weeks, and the fixed monthly repayments do not adjust if your income varies.

If you have a strong relationship with your bank, good credit, and a stable, predictable income, a bank loan may offer a lower total cost than other options. But for most small businesses that need speed or flexibility, other options will be more practical.

Peer-to-peer lending

Peer-to-peer (P2P) lending platforms connect businesses that need funding with individual investors willing to lend. Rates vary depending on the platform and your risk profile, but they can be competitive with bank loans.

The application process is typically faster than a bank but slower than a merchant cash advance. Most P2P platforms require a track record of profitability and may perform a hard credit check.

P2P lending suits small businesses that want loan-style fixed repayments but have been unable to secure traditional bank finance. It is less suitable for businesses that need speed or repayment flexibility.

Angel investors and venture capital

Angel investors and venture capital firms provide funding in exchange for equity in your business. This means giving up a percentage of ownership and, in most cases, accepting some level of outside influence over business decisions.

Equity funding can provide large sums and access to networks, expertise, and strategic support. However, it is typically only available to businesses with high growth potential and scalable business models.

For most small businesses, particularly those in hospitality, retail, or services, equity funding is not the right fit. It suits technology startups and businesses aiming for rapid national or international expansion.

How to decide which funding is right for you

Choosing the right funding comes down to four questions.

• How quickly do you need the money? If you need capital within days, a merchant cash advance is the fastest option
• Can you offer security? If not, options like MCAs, grants, and unsecured lending should be your focus
• Is your income variable or seasonal? If yes, flexible repayment options like MCAs protect your cash flow
• Do you want to retain full ownership? If yes, avoid equity funding and choose debt or revenue-based options

Frequently asked questions