Main types of finance
It takes money to make money. So what sort of finance options are there? Here are the types that fund most businesses.
Published Tuesday 10 August 2021
Introducing the finance family
Debt (loans)
Term loan: A lump sum repaid over a fixed time
Line of credit/credit card: Funds that are available to use when needed
Peer-to-peer lending: A crowdfunded loan
Friends and family: When those close to you lend you money
Invoice financing: An advance on the invoices you’ve issued
Equity finance (investors)
Equity crowdfunding: Where the public can invest in your business
Angel investors: Individuals who invest their own money
Venture capital: Professional investment groups
Friends and family: When those close to you buy into the business
Incubators and accelerators: Development schemes to build and boost small businesses
Other (revenue)
Grants: Funds that don’t have to be repaid
Presales: Customers pay before an item is generally available for purchase. This can include rewards-based crowdfunding.
The type of finance you choose matters
When you’re desperately keen to buy, start or grow a business, you may feel like any finance will do. Don’t fall into that trap. Choosing the wrong type of finance could break your business later, or severely hamstring it.
Each finance type has its own pros and cons. Use this guide to learn about them. Ask which suits your business, and you as a person – because that matters too.
Begging, borrowing, and bootstrapping
Some businesses don’t require a lot of money or capital at the outset. For example, you might only need a laptop and an internet connection if you’re offering a home-based service like proofreading or bookkeeping.
Other businesses start out really small, with minimal money, and build slowly. This is often called bootstrapping. In these cases, it’s common for owners to cobble together their own finance through personal savings, personal loans, or taking extra shifts at their day job. Even if you’re doing that, it’s worth knowing about the types of finance out there. You may just need an extra injection of cash down the road to get the business truly humming.
Disclaimer
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
How to finance your business in the UK
Need finance for your business? Learn about the types of finance, approaching lenders and investors and more.
- What is business finance?
Learn how business finance works and find the right funding for your small business.
- How much business funding do you need?
Knowing how much money you need will help you choose the right type of finance. These tips will help you find a number.
- Debt versus equity finance
Most forms of funding fall into one of two camps. Let’s look at the main pros and cons of debt versus equity.
- Main types of finance
It takes money to make money. So what sort of finance options are there? Here are the types that fund most businesses.
- How to get a business loan
Find the right business loan and put together a strong application with this step-by-step guide.
- Peer-to-peer lending
Learn how P2P lending works for UK businesses, what the risks are, and how to apply.
- Friends and family loans
Learn how to borrow from friends and family for your business, with tips on agreements, tax, and relationships.
- Invoice financing
Turn unpaid invoices into working capital. Learn how invoice financing works and which type suits your business.
- How to find investors
Find the right investors for your business with this guide to funding types, where to look, and how to prepare.
- Angel investors versus venture capitalists
Angel investors and venture capitalists are alternative finance sources. What can they offer your business?
- How crowdfunding works
Learn how crowdfunding works, the different models, and how to launch a successful campaign for your small business.
- Small business grants
Find UK small business grants, check eligibility, and apply with confidence.
- Pitching for business funding
Learn how to pitch your business to investors and lenders with practical, step-by-step guidance.
Download the guide to financing your business
Your intro to the different types of finance, including their pros and cons. Fill out the form to receive our finance guide as a PDF.
Now that you have your guide
Managing finances can feel overwhelming. With Xero’s powerful tools, small businesses can stay organised and confident.