Chapter 4

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.

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

Need finance for your business? Learn about the types of finance, approaching lenders and investors and more.

  1. What is business finance?

    Your new business idea is ready to go. Now you need to find the right small business funding. But where do you start?

  2. 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.

  3. 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.

  4. 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.

  5. How to get a business loan

    Getting a business loan is still one of the most common ways to finance a business. So let’s look at how to get one.

  6. Peer-to-peer lending

    Peer-to-peer lending is an alternative method of getting a business loan. How does it work?

  7. Friends and family loans

    Friends and family loans may be available when other types of finance aren’t, but they do require some precautions.

  8. Invoice financing

    Ever thought your cash flow would be better if everyone just paid what they owed you? Well, you may not have to wait.

  9. How to find investors

    How do you find investors for equity financing? Let’s look at what types there are and where to locate them.

  10. Angel investors versus venture capitalists

    Angel investors and venture capitalists are alternative finance sources. What can they offer your business?

  11. How crowdfunding works

    Crowdfunding can get you money to build a business, and the attention to build a customer base.

  12. Small business grants

    Grants are a great funding option for some businesses. They can be a lot of work to get, but the reward is free money.

  13. Pitching for business funding

    Seeking business funding is a major step but you needn’t be daunted. Here’s how to pitch your business.

  14. Tools and guides for your business

    Now that you’re in business, you want to stay there. Xero’s got resources and solutions to help.

Download the guide to financing your business

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