UK businesses have various funding options depending on their circumstances i.e. the type of business they run, the sector they are operating in and the availability of assets against which to secure any facility, although there can be a multitude of factors to consider before a funder advances a facility.
Traditionally, the two main sources of funding have been debt finance and equity finance:
- Debt finance is where a funder provides a loan of some description, that may be secured against assets or offered on an unsecured basis, to the Company to provide finance to the business. A company can also issue its own debt instruments in the form of loan notes or bonds as a form of fund raising although they will need to find investors who are willing to purchase them.
- Equity finance typically takes the form of the Company issuing share capital that is purchased by investors. The shares will carry certain rights, such as rights to dividend, rights to vote on decisions affecting the Company, etc, that are set out in the Company’s articles of association. Debt finance is commonly used by businesses because it generally has a fixed cost, a fixed term and the interest payments are tax-deductible. There are usually conditions around the loans and security provided – even ‘unsecured’ loans often require a personal guarantee from the directors.