Business Funding Explained, and How the Types Differ

Alex BeardsleyFounder & Director

|Updated July 2026

When you need funding for your business, the number of options available can feel overwhelming. Term loans, revolving credit, invoice finance, grants. What's the difference between them?

This guide walks through the main types of business funding available to UK SMEs, explaining how each works, who typically uses it, and the trade-offs involved.

Term Loans

A fixed amount borrowed and repaid over a set term, which each lender sets, in regular monthly instalments. Interest can be fixed or variable. This is the most traditional form of business finance.

• Commonly used by: planned investments, large purchases, or expansion projects with predictable costs
• Pros: predictable monthly payments, with the total cost set out in the offer
• Cons: each lender publishes its own eligibility criteria and timescale, and security may be asked for

Revolving Credit Facility

Similar to a business overdraft, you're given access to a credit limit and can draw down funds as needed. You only pay interest on the amount you use, and as you repay, the credit becomes available again.

• Commonly used by: managing cash flow gaps, covering short-term costs, or bridging payment delays
• Pros: flexible access to funds, only pay for what you use
• Cons: the pricing and any renewal fees are set by each lender and set out in the offer

Invoice Finance

If your business invoices other companies, invoice finance lets you access the cash tied up in unpaid invoices. The funder advances a percentage of the invoice value, which each lender sets, upfront, then collects payment from your customer.

• Commonly used by: B2B businesses with long payment terms (30-90 days)
• Pros: improves cash flow by releasing money tied up in unpaid invoices, grows with your sales
• Cons: only works for B2B invoicing, fees can add up over time

Asset Finance

Asset finance helps you acquire equipment, vehicles, or machinery by spreading the cost over time. This can take the form of hire purchase (you own the asset at the end) or leasing (you return or upgrade the asset).

• Commonly used by: businesses needing equipment, vehicles, or specialist machinery
• Pros: preserves working capital, potential tax benefits, keeps equipment current
• Cons: tied to specific assets, early termination penalties may apply

Business Grants

Grants are funding you don't have to repay. They're offered by government bodies, local authorities, and some private organisations for specific purposes such as innovation, environmental projects, or regional development.

• Commonly used by: businesses with a specific project that aligns with grant criteria
• Pros: no repayment, no equity given away
• Cons: highly competitive, strict criteria, time-consuming application process

How the product changes who will lend

Each product has its own group of lenders. Through our panel we have access to a range of commercial finance lenders, but a bank that writes commercial mortgages may not touch invoice finance, and a specialist bridging lender will rarely write an unsecured loan.

Product limits differ too. Borrowing secured on property or on a machine can run to far larger sums than an unsecured loan, because the lender has something to sell if the payments stop.

Eligibility is where the real filtering happens. Time trading and whether the director owns a home move a case from one lender's criteria to another's, and each lender publishes its own trading minimum. Criteria vary from lender to lender, and they move often enough that a list six months old is worth very little.

How the Options Differ

The types differ on these points:

• Timing: each lender sets its own decision time, and grant programmes run to their own timetables
• What the funding is for: asset finance is secured on the equipment it buys, while revolving credit is drawn and repaid as needed
• Your trading history and credit profile: each lender publishes its own trading minimum
• How your business earns revenue: invoice finance advances against invoices to other businesses

A commercial finance broker checks your details against several lenders' published criteria at once, instead of you applying to each individually. Which option to take is your decision.

CapExpand Ltd (FRN 1060885) is a credit broker and an Appointed Representative of White Rose Finance Group Limited (FRN 630772), which is directly authorised and regulated by the Financial Conduct Authority. We are a broker, not a lender. We work with UK limited companies and LLPs only, for business and commercial purposes. We do not provide financial advice.