Small business guide: What’s the right finance product for your small business?

If you’ve ever considered business finance, but were left feeling overwhelmed after a quick Google search, you’re not alone.

According to Money Advice Trust, almost a third (29%) of small business owners cited a lack of skills and confidence managing their business finances, or difficulties in their financial situation, as a key barrier to growing their business in the next 12 months.

If you are keen to grow but are confused by what help is available, our guide to the main business finance products on the market will help you decide what finance is right for you.

What business finance products are available to small business owners?

From traditional business loans to flexible lines of credit or asset finance, there is a finance product tailored for every business need. Here we deep dive into the seven main types of business finance available, looking at the pros and cons of each, and what type of business it’s best suited for.

Business loans

A business loan is an agreement between a lender and your business. A lender agrees to give your business money that you agree to pay back over time.

You’ll pay the lender interest on the loan, so you repay more than you initially borrowed. Payments are usually made monthly, though this can vary depending on the type of loan.

A business loan can be used for almost any business purpose, either for a specific need, such as buying stock or upgrading equipment, or to support day-to-day operations and cash flow. 

Read our complete guide to small business loans and how they work here.

Benefits of a business loan

• Gives your business a quick injection of capital

• Spreads costs over time with a fixed interest rate that gives predictable repayments 

• You get full control of how to spend it and you own the asset outright

Potential drawbacks of a business loan

• You will pay more than you initially borrowed with interest

• You will need to repay every month, which could be tricky during quiet periods when cash flow is tight

• It may require a personal guarantee

A business loan could be right for your business if…

• You're buying assets that will add long-term value to the business

• You have a fairly reliable source of income to confidently meet the monthly repayments

• You require additional funds to grow or expand your business

• You wish to improve your business credit score

If you think a business loan might be right for your business, you can check if you qualify in 30 seconds on our website.

Lines of credit

A line of credit is a flexible finance option. A lender agrees to provide your business with a certain amount of money (known as a credit limit) that you can borrow from whenever you need to.

You typically only pay interest on the money you actually use, rather than the total amount available (although with FlexiPay from Funding Circle, there is no interest to pay, just one flat fee per transaction).

Some lines of credit have a fixed expiry date, while others are revolving, meaning you can borrow again once you’ve repaid.

Due to its flexibility, business lines of credit are useful for covering short-term expenses, such as paying suppliers or unexpected bills, or managing cash flow. 

Read our complete guide to business lines of credit here.

Benefits of a line of credit

• Less risky than a loan as interest is only charged on what you use

• Flexible – you only borrow the money you need 

• Credit limit often recharges so that you can keep using it without the need to reapply

Potential drawbacks of a line of credit

• Often smaller amounts available than with other types of finance

• Can be more expensive than other types of finance, especially if your credit score isn’t strong

• Ease of use means it can be tempting to borrow more than you can comfortably afford to repay 

A line of credit could be right for your business if…

• You’re looking for fast, ongoing access to finance that’s low-risk and flexible

• Your business income is variable, such as a seasonal business, and you need a little help to get through the quiet periods

• You have a lower credit score

If you’re interested in a business line of credit, our FlexiPay product might be right for your business. Find out how it works here.

Business credit cards

A business credit card is like a personal credit card, but it can only be used for business expenses. A lender agrees to give your business access to a set amount of money that you can borrow. You can use that line of credit to make purchases and then repay at a later date. 

If you pay the full balance every month you usually don’t pay any interest. 

A business credit card can be used for any business expense, but is best suited for small, regular spending that can be repaid monthly so interest doesn’t add up. 

Read our complete guide to business credit cards here.

Benefits of a business credit card

• Often have higher credit limits than personal credit cards

• Can issue cards to more than one user

• Options to earn cashback or rewards

Potential drawbacks of a business credit card

• Most business credit cards require a personal guarantee, making you personally liable

• Interest rates are often higher than personal credit cards

• Some consumer credit protections don’t apply to business credit cards

A business credit card could be right for your business if…

• Your business has a reliable regular income and you feel confident you can pay off the balance each month

• You’re looking to organise short-term regular spending 

• You want to build your credit score

If you want to learn more about how a business credit card might help your cash flow, find out more about our range of business credit cards here.

Asset finance

Asset finance is simply that: finance used to purchase a specific business asset. It can be used for acquiring a new or used asset, or raising finance against an existing asset to gain extra working capital.

The asset purchased is used as security against the loan, so if you don’t meet your repayments, the lender can sell the asset to recover the outstanding debt.

Read our complete guide to asset finance here. 

Benefits of asset finance 

• You get the asset sooner, which could generate extra revenue to help you repay the finance 

• Allows you to spread costs over a fixed term

• Can be easier to get approved as the asset acts as security

• You can benefit from tax breaks when buying a new asset

Potential drawbacks of asset finance

• Fees and interest mean you’ll pay more for the asset over time than you would if you bought it outright

• Risk losing the asset if you fail to meet your repayments

• May not own the asset until the end of the agreement

Asset finance could be right for your business if…

• You’re looking to fund a new or used asset, such as equipment, commercial vehicles or machinery

• You want to grow quickly or scale

• You want predictable monthly repayments

• You’ve struggled to access traditional business finance

With almost all of our customers getting a deal up to 50% cheaper with asset finance than a term loan, it could be a cost-effective way to acquire a new asset sooner.

Government-backed loans

A Government-backed loan, now known as the Growth Guarantee Scheme (GGS), is designed to help UK small businesses get the finance they need to invest and grow.

It works in the same way as a business loan and can be used for any business purpose. With the GGS, however, lenders have a 70% government-backed guarantee against the outstanding balance of the debt after it has completed its normal recovery process. 

That means if a business can’t repay the loan, the lender can claim part of the loss from the government. 

Read our complete guide to the Growth Guarantee Scheme here.

Benefits of a Government-backed loan

• Easier to access – thanks to the government guarantee, it’s less risky to the lender so they can say yes to more businesses 

• Gives business owners more confidence in taking on finance, knowing the government backs part of the loan

• Helps business owners spread their investment costs over a fixed period

Potential drawbacks of a Government-backed loan 

• A personal guarantee may be required, but Principal Private Residences can’t be taken as security under the GGS

• Businesses remain 100% liable for the debt

• Interest rates could be higher due to the increased risk to lenders 

A Government-backed loan could be right for your business if…

• Your business has struggled to get a loan previously

• You want quick access to finance to help you manage short-term funding gaps

• You want to access finance to help you grow

Merchant cash advance

A merchant cash advance lets a business that takes debit or credit card payments borrow money upfront. The lender agrees on the total amount your business will repay, including their fee. Instead of fixed repayments, the lender takes a small percentage of your future card sales until the amount is paid back.

Repayments are linked to card revenue and adjust accordingly, so when sales are high, you pay back more, and when sales are low, you repay less. 

Because repayments are linked to card revenue, this type of funding works best for businesses with regular card transactions that can comfortably afford to forfeit a percentage of their sales. It’s not suitable for businesses that primarily take payments in cash or via other transfer options.

Benefits of merchant cash advance

• The total amount you repay is fixed, so it doesn’t change if sales are slow

• Available to businesses that have been trading for 6 months

• Flexible – no fixed payments, fixed terms or security required

Potential drawbacks of merchant cash advance

• You need to be taking at least £10,000 per month in debit and/or credit card sales to be eligible for this type of funding

• It can cost more than traditional loans

• Frequent payments from card sales can put pressure on cash flow

A merchant cash advance could be right for your business if…

• You’ve only recently began trading

• You’ve got healthy card sales 

• You have steady cash flow and can afford to give up a percentage of your sales

• You want a quick-fix, short-term solution  

Invoice finance

Invoice finance is a form of lending based on your invoices. It helps you get paid sooner for work you’ve done. Your provider buys up your unpaid invoices, or lends you money against the value of the accounts receivable. 

Instead of waiting for customers to pay their invoices, a finance provider gives you most of the money upfront. When your customer pays the invoice, the provider takes their fee and sends you the remaining balance.

Invoice financing can help reduce pressure from late-paying customers. It’s useful in helping businesses manage their short-term cash flow while waiting for customers to pay their invoices. 

Benefits of invoice finance

• Access funds you’re due without waiting for clients or customers to pay the amount owed

• Flexible – You can increase the fund request as your revenue grows, and scale it back when you need to

• No need for extra security – the invoices themselves are usually used as security, not business assets

Potential drawbacks of invoice finance 

• You don’t receive the full income from your goods or services as your provider takes a cut, including a monthly interest rate and service fees

• Can be more expensive than a business loan 

• Providers will only lend against invoices due from clients or customers they expect to pay

Invoice financing could be right for your business if…

• You’re paid a substantial amount through invoices

• You’re a service-based business selling to other businesses, not direct to the consumer 

• You have reliable customers who will pay invoices eventually

• You have irregular cash flow that is holding back growth

At Funding Circle we offer business loans, lines of credit and business credit cards. We also work with a panel of trusted lenders who offer an array of products, including asset finance, merchant cash advance and invoice financing.

If one of our products isn’t the best fit for your business, your dedicated Account Manager will help you navigate the available options to find a deal that works for you. 

Get finance that works for your business.

02/01/26: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.