Starting a business today can be done on a surprisingly small budget – many entrepreneurs begin with just a laptop, smartphone, and a good internet connection. But as your business grows, there often comes a point when extra funding is needed. Whether you’re looking to expand into new markets, invest in equipment, take on staff, or simply manage cash flow, the way you finance that growth can make a big difference to both your future strategy and your tax bill.
In this article, we’ll explore the most common funding options available in 2025, along with the tax implications you need to be aware of before making a decision.
Gifts from Family and Friends: Tax Implications
One of the first ports of call for many new entrepreneurs is close family and friends. Borrowing or receiving a gift from them can feel less daunting than approaching banks or investors. But while it may be straightforward, there are still tax considerations.
• Personal gifts made to a business or its owner aren’t usually treated as taxable income. However, inheritance tax (IHT) rules come into play if the donor passes away within seven years of making the gift, as it may then form part of their estate.
• Director’s loans are another route. If you’re a company director, you can lend money to your own company. The company can repay you without any tax consequences, and if you charge interest, the interest payments may be deductible for the company (though taxable for you personally).
• Asset transfers between connected parties must be recorded at market value. If, for example, a parent transfers a van or piece of equipment into your company, they may face capital gains tax on any increase in value since they acquired it. In short, while family support can be invaluable, it’s worth documenting the arrangement carefully and considering the long-term tax picture.
Government Grants and Schemes
Grants are an attractive form of finance because they don’t need to be repaid. The government regularly updates support available to small businesses, particularly in areas like research, development, innovation, and sustainability.
• Tax treatment of grants: Most grants are treated as taxable income unless they are specifically exempt. This means they will increase your profits for corporation tax purposes, though of course you still keep the cash benefit of receiving the grant.
• R&D tax reliefs: Even if you don’t receive a grant, you may qualify for Research & Development tax credits, which allow companies to claim relief on eligible innovation costs.
• Investment schemes: The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) offer generous tax incentives to investors, such as upfront income tax relief of 30–50% and potential capital gains tax exemptions. These schemes have strict eligibility criteria but can make your business much more attractive to outside investors. It’s worth speaking to an adviser before applying for grants or schemes, as timing and eligibility can make a big difference to the benefit you ultimately receive.
Business Loans: Tax-Deductible Interest
For many established small businesses, traditional bank lending is still the most accessible source of funding.
• Loan treatment: The capital you borrow isn’t taxable and doesn’t affect profit, as it’s a balance sheet item.
• Interest deductibility: The interest you pay is tax-deductible, which reduces your corporation tax bill. This can make loans more attractive than they might first appear.
• Relationship with your bank: Even if you don’t need a loan right now, opening smaller facilities such as overdrafts or small loans can help build a track record with your bank, making it easier to secure larger lending in the future. However, remember that banks will want to see strong financial records and a solid business plan. Poor credit history or weak cash flow can limit the amount available.
Alternative Funding: Equity and Crowdfunding
Not every business is suited to loans, and not every entrepreneur wants to take on debt. That’s where alternative financing comes in.
Venture Capital & Angel Investment
These investors provide money in exchange for equity (shares) in your company. This can be a huge boost for fast-growth businesses, bringing not just funding but also expertise and networks. The trade-off is that you may need to give up some control, as investors often want a say in key business decisions.
Crowdfunding
Crowdfunding has exploded in popularity, allowing businesses to raise money from lots of small backers online. There are a few different types:
• Reward-based crowdfunding – where backers receive products, services, or perks in exchange for funding. These funds are usually treated as taxable income for the business. If the rewards are goods or services that would normally attract VAT, VAT will also need to be accounted for.
• Equity crowdfunding – where backers receive shares in your business. The tax treatment is similar to other share investments, with potential for investors to benefit from SEIS/EIS reliefs.
• Donation-based crowdfunding – generally used more for charitable projects, with no rewards or equity involved. Crowdfunding is particularly useful for businesses with a strong story or product that appeals to the public, but it requires a well planned campaign and marketing effort.
Hire Purchase and Leasing
For businesses that need vehicles, machinery, or IT equipment, financing through hire purchase or leasing can be a smart option.
• Hire purchase: You gain use of the asset from day one, spread the cost over time, and claim capital allowances once the asset is in use. Finance charges are tax-deductible. VAT is usually payable upfront, though some may not be reclaimable for cars.
• Finance leases: The lessor retains ownership, so you can’t claim capital allowances. Instead, lease payments are split between deductible finance charges and liability reductions. VAT can be reclaimed on each payment.
• Operating leases: Typically shorter-term and more flexible, with the payments fully deductible as a business expense. These options help preserve cash flow while still allowing your business to access the tools it needs to grow.
Newer Trends in 2025
Beyond the traditional sources, a few newer trends are worth mentioning:
• Green finance: Many lenders now offer preferential terms for investments in sustainability, such as energy-efficient equipment, electric vehicles, or renewable energy.
• Revenue-based financing: Rather than fixed repayments, this model allows repayments to flex with your revenue, making it more manageable during slower months.
• Peer-to-peer lending platforms: These continue to grow, often offering faster decisions than banks, though sometimes at higher interest rates. These options may not be suitable for everyone, but they’re worth considering as the funding landscape continues to evolve.
Key Considerations Before Choosing Finance
Whichever funding route you take, there are some universal principles to bear in mind:
1.Understand the tax impact – don’t just look at the headline amount of finance. The after-tax effect can vary significantly depending on whether you’re borrowing, raising equity, or receiving grants.
2.Keep detailed records – HMRC will expect clear documentation of loans, grants, and equity investments.
3.Plan repayments carefully – debt can be a useful tool, but only if you’re confident of being able to service it.
4.Think long-term – giving up equity may feel attractive now, but consider the future value of your business.
5.Compare providers – interest rates, repayment terms, and investor conditions can differ hugely. Shop around before committing.
Need Help with Business Finance?
Choosing the right type of finance isn’t just about raising the money. It’s also about understanding the tax consequences, managing responsibilities, and protecting the future of your business.
At Jon Davies Accountants, we work with small business owners across the UK to navigate these choices. Whether it’s deciding between a bank loan and equity, applying for a grant, or working out the VAT treatment of a lease, we can help you see the full picture and avoid pitfalls. If you’re considering your next step in business financing, get in touch with us today – we’ll make sure your decision works not just for the short term, but for the long-term success of your business.