Types of business finance: which one actually fits your needs?

Not all business finance is created equal. And here’s the thing some people don’t realise: you don’t always need a traditional loan.

Depending on what you’re trying to achieve, whether it’s getting equipment, covering cash flow gaps, or funding a specific project, there’s likely a type of finance that’s been designed exactly for that. The trick is knowing what’s out there, and which one makes sense for your situation.

Let’s break down the main options and what they’re actually good for.

Business loans

This is the classic. You borrow a lump sum, pay it back over an agreed period (usually with interest), and that’s that. Business loans work well when you need a significant chunk of cash upfront for something specific, like expanding premises, hiring staff, or launching a new product line.

They’re straightforward, predictable, and give you full control over how the money gets spent. Just make sure you can afford the repayments before you commit.

Asset finance

Need new equipment but don’t want to drain your cash reserves? Asset finance lets you spread the cost of big-ticket items like machinery, vehicles, or tech over time. 

There are a couple of options here. With hire purchase, you own the asset outright once you’ve made the final payment. With leasing, you’re essentially renting it for a set period. Either way, you can get what you need without the massive upfront hit, and the asset itself often acts as security, which can make approval a little easier.

Invoice finance

The Federation of Small Businesses (FSB) has suggested that every quarter, more than half (52%) of UK SMEs experienced at least one late payment. So, if your biggest headache is customers paying late, invoice finance could be a lifesaver. It works by advancing you a percentage (usually 70-90%) of your unpaid invoices, so you don’t have to wait 30, 60, 90 days to get paid.

You get the cash flow you need to keep operating, and the finance provider collects payment from your customer when the invoice is due. It’s not cheap, but if late payments are strangling your business, it might be worth it.

Business credit cards

For smaller, one-off purchases — new laptops, software subscriptions, travel costs — a business credit card can be a simple, flexible option. You get instant access to credit, and if you pay it off the balance owed in full each month, you won’t pay any interest. Some cards also offer cashback or rewards, which can be a nice bonus. Just don’t let the balance spiral. 

Merchant cash advances

This one’s a bit different. A merchant cash advance gives you a lump sum upfront in exchange for a percentage of your future card sales. Repayments come out automatically based on your daily transactions, so they flex with your revenue. It’s fast and convenient, but it also tends to be one of the more expensive options.

Overdrafts

An overdraft gives you a safety net – a pre-agreed amount you can dip into when cash flow gets tight. It’s flexible, and you only pay interest on what you use. An overdraft can be great for covering short-term gaps or unexpected expenses, but it’s generally not ideal as a long-term solution. If you’re constantly in your overdraft, that’s probably a sign you need to look at a more sustainable funding option.

The bottom line

The right type of finance depends entirely on what you’re trying to do. Need equipment? Look at asset finance. Struggling with late payments? Invoice finance might help. Want flexibility for day-to-day spending? A credit card or overdraft could do the job.

Don’t just default to a traditional loan because it’s the most obvious option – take the time to match the finance type to your actual need.