In short: Most UK small businesses are funded by the founder's savings, a government-backed Start Up Loan, bank lending or outside investment. The right option depends on how much you need, how quickly you can repay it and how much control you want to keep. Compare the total cost, not just the headline rate.
Almost every business needs money at some point – to start, to buy equipment, to cover a slow month or to grow. This guide walks through the main options in the UK and what to think about before you sign anything.
Start with how much you really need
Before you look at lenders, work out:
- what the money is for – start-up costs, stock, equipment, marketing or cash flow
- how much you need, with a buffer for delays
- when it will pay back – a cash flow forecast shows whether you can afford repayments
- what you can offer as security, if anything
A lender or investor will ask for a business plan and forecasts, so preparing them now saves time later.
Your own savings and friends and family
Many founders use their own money first. It is quick and you keep full control, but only invest what you can afford to lose. If friends or family lend you money, put the terms in writing – amount, repayment dates and any interest – to avoid misunderstandings.
Start Up Loans
The Start Up Loans scheme is government-backed and run through the British Business Bank. According to the Start Up Loans website, as of October 2026:
- you can borrow up to £25,000
- the interest rate is fixed (check the current rate on the official website)
- the repayment term is 1 to 5 years
- there are no arrangement or early repayment fees
- you must be 18 or over and starting a business or trading for less than 60 months
- first-time borrowers get 12 months of free mentoring
It is a personal loan used for business purposes, so you are personally responsible for repaying it even if the business trades through a limited company. Check the latest terms on the official website before applying.
Bank loans and overdrafts
Term loans suit one-off costs, such as equipment or a fit-out. You borrow a fixed amount and repay it over an agreed period. Banks usually want to see trading history and may ask for security or a personal guarantee.
Overdrafts help with short-term gaps in cash flow. They are flexible but can be withdrawn, and interest can be high.
Shop around. Challenger banks and specialist lenders may suit newer businesses better than high street banks.
Asset finance
Asset finance lets you spread the cost of equipment, vehicles or machinery. Hire purchase means you own the item once you have paid for it; leasing means you rent it. The asset itself is usually the security, so you may not need other guarantees.
Invoice finance
If customers take 30, 60 or 90 days to pay, invoice finance lets you borrow against unpaid invoices. It improves cash flow but costs a percentage of the invoice value, and with factoring your customers will know you are using it.
Grants
Grants do not need to be repaid, but they are usually small, competitive and tied to specific goals, such as innovation, green projects or hiring in certain areas. Look on GOV.UK, your local council and, in Scotland, Business Gateway and Scottish Enterprise. Be wary of anyone charging a fee to "guarantee" a grant.
Equity investment
You sell part of your company in return for cash. Options include:
- angel investors – individuals investing their own money, often with advice and contacts
- venture capital – larger sums for businesses aiming for fast growth
- crowdfunding – many small investors, usually through a regulated platform
Equity investment is only available to companies, not sole traders, because you need shares to sell. Investors will want a clear say in key decisions, often through changes to the articles of association and a shareholders' agreement. Some tax relief schemes for investors exist; an accountant can tell you whether your company qualifies.
Personal guarantees: read carefully
A limited company protects your personal assets from most business debts. But if you sign a personal guarantee, you are agreeing to repay the loan yourself if the company cannot. Many lenders ask for one from directors of new companies. Understand exactly what you are signing and take legal advice for large amounts.
Compare the true cost
When comparing offers, look at:
- the total amount repayable, not just the interest rate
- arrangement, exit and early repayment fees
- whether the rate is fixed or variable
- security and guarantees required
- what happens if you miss a payment
How Form My Company can help
Lenders and investors expect a properly set-up company with up-to-date filings. Our Fully Inclusive Package forms your company and registers it for VAT and PAYE, with the Companies House fee and VAT included in the price. If you are bringing in investors, our Share Issue or Transfer service handles the paperwork, and we can provide board resolutions and minutes for loan approvals. We do not give financial advice, so speak to a qualified adviser before taking on debt.
Frequently asked questions
How much can I borrow with a Start Up Loan?
Up to £25,000 at a fixed interest rate, repaid over 1 to 5 years. Check the current rate on the Start Up Loans website. Check the current terms before applying.
Do I need a limited company to get investment?
For equity investment, yes – investors buy shares, and only companies have shares. Loans are available to sole traders and companies.
What is a personal guarantee?
A promise to repay a business loan yourself if the company cannot. It removes the limited liability protection for that debt.
Are business grants free money?
Grants do not need repaying, but they are competitive and usually tied to specific projects or conditions. Never pay someone to guarantee one.