What is VoIP and how does it work? The ultimate guide

VoIP has revolutionised cloud-based communications for businesses around the world. Giving them flexibility that just can’t be offered by traditional phone systems. We’re here to help you understand everything you need to know about VoIP, and why a VoIP phone system is the best option for your new business phone system

  1. What is VoIP?
  2. How does VoIP work?
  3. How much does VoIP cost?
  4. How to switch to VoIP
  5. VoIP vs Landline & ISDN
  6. VoIP & SIP
  7. VoIP bandwidth
  8. VoIP equipment
  9. The VoIP glossary
  10. VoIP FAQs

What is VoIP?

VoIP, which is short for Voice over Internet Protocol, is the ability to transfer voice communications over IP networks. Essentially it lets you deliver voice and sound over the internet rather than a standard phone line.

VoIP is also referred to as IP telephony and internet calling. You’ll find people discussing cloud-based phone systems in the same breath, as the technologies go hand in hand.
VoIP allows users to make a phone call over the internet, without the need for a traditional landline. VoIP has come on a long way in recent years, with both the software and hardware evolving. It means that VoIP can offer high-quality calls on the go, without tying you down to a desk phone or an office.

VoIP is an incredibly flexible solution, as it can offer you voice communications without a fixed location. You’ll be able to access your phone calls with no hassle and avoid the overheads of installation costs and hardware.
Basically, VoIP is the flexible and cost-effective alternative to public switch telephone networks (PSTN) and you should be considering it for your business.

How does a VoIP phone system work?

A VoIP service works a little differently from a PSTN. When you transmit your voice via IP you aren’t sending it down a phone line, you’re converting it into a digital packet then transmitting it via IP.

It’s a simple process of convert, transmit and unpack. It works something like this:

Convert

A codec converts your data into a digital ‘packet’. This compresses your voice signals and converts them into digital signals.

Transmit via IP

The packet is then transmitted via IP. This is either done locally over a Local Area Network (LAN) or else online via the internet. This transmission is instantaneous.

Arrive & Unpack

The data packs arrive at their destination. More codecs will unpack the data and convert it back into voice or audio signals.

The great thing about VoIP systems is that they can often work within your existing systems. The recipient doesn’t have to have a specialised device and nor do people who are calling you. The final packet, once it’s converted back, will run along a standard phone line. You can even get hardware that’s enabled with software for VoIP. These VoIP phones are just like other desk phones you may have had in the past, but with access to more features.

CircleLoop lets you access your VoIP phone system through apps on your computers, but still gives the option of physical business phones if you need them.

What are codecs?

Codecs are used twice in the VoIP process. They convert the audio into a digital packet before they’re transmitted and then convert them back to audio at the other end. A codec is a piece of hardware or software that compresses, encodes and then decompresses data. In terms of VoIP, this data is the audio packets.

How is voice data transmitted over IP?

The transmission stage needs a little explanation. When your data packets are transmitted it’s done over one of two systems. If you’re making an internal call it could be done through your LAN intranet, but if you’re making or receiving an external call, it’s likely to be transferred online.

When this call is being transferred online the data will be carried by either a Real-Time Transport Protocol (RTP) or a Secure Real-Time Transport Protocol (SRTP). These are the same, but an SRTP is encrypted. All CircleLoop communications are done securely with an encrypted SRTP.

Try it for free today

What does a VoIP system cost for businesses?

One of the best things about VoIP is its low point of entry. Not only do you not need a physical phone line and hardware, but the line rental costs are low and the installation costs are non-existent.

This means that business VoIP phone systems are incredibly affordable. Our own service, for instance, starts at just £5 per user per month and comes with a wide array of features that you have to pay extra for on a landline. Call charges can be a lot lower, and some packages come with inclusive minutes.

As there’s no need for an engineer to come out and install your phone system or a need for purchasing expensive hardware, VoIP is a cheap communication solution for any business.

See our pricing

Switching to VoIP

Setting up a new VoIP phone system is simple. As you don’t need an engineer or hardware to be delivered you can do it at the click of a few buttons. With CircleLoop all you need to do is sign up and download the app, then you’re good to go.

Before you switch though, it’s worth doing a few things:

Check you have a strong, reliable internet connection and that you can optimise your router for voice

Put aside some time to train your team on your new system

Test your new system with a free trial

CircleLoop lets you port your old numbers and, if you’re using an address book tool like Office 365 or one of the many CRO tools on the market, you can import all your contacts directly into your VoIP phone system. Check out our tool integrations for more information.

The difference between VoIP and a phone line

A traditional office phone system relies on a landline. These analogue phone systems rely on a physical landline that connects to a phone socket and then a handset. Many businesses combine this with a private branch exchange (PBX) system, which allows an office to have multiple phone lines service a greater number of phones.

A fully virtual VoIP system means you don’t need any of the above. While you can get hybrid systems, going for a complete VoIP system means you simply need access to the internet and can use a softphone through your computer or smartphone.

The beauty with a virtual system like this is that it can allow additional phone system features to be added, like call recording, conference calling, and call analytics all at no extra cost. You can even gain a virtual presence in another area with virtual numbers.

Landline Vs Voip

The difference between VoIP and ISDN

An Integrated Services Digital Network (ISDN) is another form of digital phone system. But, unlike VoIP, it relies on a physical line. This makes it much more akin to a traditional landline phone system. You’ll have to lease your phone line, and while quality can be better than some traditional business phone systems, you’re still going to be hindered in many of the same ways.

What’s more, in 2025, we’ll be seeing the big switch off. This is where PTSN and ISDN systems will be removed and businesses that rely on them will need to switch. VoIP is by far the best solution for these businesses to switch to.

What’s the ISDN switch off?

What about SIP? Is there a difference between SIP and VoIP?

In reality, session initiation protocol (SIP), shouldn’t be directly compared to VoIP. SIP is a set of protocols that actually help enable VoIP.

SIP establishes the connection that VoIP uses to transfer its VoIP packets.You’ll not be looking to get SIP or VoIP, you’ll likely actually be trying to set up a system that uses both. When you set up a VoIP phone system your SIP trunking should be included.

Learn more about SIP

How much bandwidth does VoIP use and what’s the optimal internet speed?

VoIP calls rely on the quality of the internet connection for optimal quality. This means there’s a minimum requirement of 90-100 kbps is required.

This has to scale too, if you’re all using a VoIP connection from one office location, you’ll need that for each person you expect to be on a call at the same time. Say you’ve got a small team of 5 who you’re expecting to be calling frequently, you’ll need 500 kbps or 0.5 Mbps of bandwidth available. That’s dedicated bandwidth for VoIP calls too, not just your overall bandwidth.

For a small business, this is realistic and shouldn’t be too much of an issue, but for larger businesses, with more users it could cause an issue.

The Pros & Cons of VoIP phone systems

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Keep line rental costs low
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No need for costly equipment
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Access from anywhere
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Add users and numbers quickly and painlessly
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No fixed term contract
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Excellent voice quality
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No landline needed
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Use on desktop, mobile or with softphones
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Works on 4G and 5G when you have a good signal
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Dedicated bandwidth needed
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Potential for latency
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A reliable internet connection needed

What equipment do I need for a VoIP phone system?

While a VoIP phone system offers great flexibility, and doesn’t require a landline, there are a number of things you may need to get going.

No matter how you’re going to be communicating, the absolute essential is a quality broadband connection that offers enough bandwidth to make your calls clear alongside any other internet needs within your business. We’d recommend a fibre optic connection for best quality and unlimited downloads is important. So that’s:

Broadband connection
Broadband connection, preferably fibre optic
router
Router
Ethernet
Ethernet connection for computer or phone

Then you just need to work out what type of VoIP system you’re running. You’ll have three options; a physical VoIP enabled desk phone, a computer app or a smartphone app. Each will have different equipment needs.

VoIP deskphone

You’ll need a VoIP adapter, a VoIP enabled desk phone and then a router that allows you to connect your phone directly to it using an ethernet cable.

VoIP via computer

You’ll need a laptop, desktop or Mac. For best quality possible we’d recommend an ethernet connection, but you may be ok with WiFi if your internet is good. Then you’ll need a VoIP phone app, like CircleLoop, and a headset for best call quality.

VoIP via smartphone

You’ll need a smartphone with your VoIP app installed. Ideally we’d recommend you use the app on WiFi where possible over 4G or 5G.

If you’re looking for VoIP phone hardware we can help, with headsets, speakers and VoIP enabled deskphones.

Learn more about VoIP

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The VoIP Glossary

At CircleLoop we understand how irritating all the acronyms and jargon can be. So we’ve put together a quick glossary so you can understand the VoIP technical terms at a glance.

IP

The ‘internet protocol’ that provides the rules for transmitting data online. It’s these rules, which are standardised, that allow mismatching platforms to communicate. For instance, an app-based phone communicating with a physical phone.

PBX

Otherwise known as a private branch exchange. Essentially it’s an office phone network. It’s what lets you port calls around your organisation.

RTP & SRTP

Short for (secure) real-time transport protocol. It’s the internet protocol that transmits your voice data packets. The secure version encrypts your data.

SIP

SIP, or Session Initiation Protocol, is a signalling protocol that’s used to establish VoIP communications.

Learn more about SIP

Softphone

Essentially a software phone. This means it’s either a piece of standalone computer software or an app that lets you make a call. They usually have a phone interface for ease of use.

IVR

Interactive Voice Response is the ability to make an interactive menu that uses voice commands.

Learn more about IVR greetings & menus.

LAN

Port your old number over to CircleLoop, so you haven’t got to worry about losing key inbound prospects.

Codec

Codecs aren’t unique to VoIP. They’re a device or software that is used to compress, encode and decompress data. For VoIP systems, they are used to convert the voice data before and after transmission.

DSL

This is the technology that’s used to transmit data over a telephone line. It’s what lets you use both broadband internet and your phone line at the same time.

Simple pricing

No contract, no set-up fees, no nasty surprises.

Offer

RECOMMENDED

Make 15 + mins of calls a day

Unlimited

£15

+ VAT monthly per user

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Includes 1 UK Number

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All CircleLoop features

(Including call recording, conference calling & voicemail to text)

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Unlimited inbound calls

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Unlimited outbound calls

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International calls

From 3p / min

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SMS

4p / message

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No set-up or activation fees

Pay As You Go

£5

+ VAT monthly per user

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Includes 1 UK Number

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All CircleLoop features

(Including call recording, conference calling & voicemail to text)

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Unlimited inbound calls

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UK outbound calls

From 3p / min

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International calls

From 3p / min

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SMS

4p / message

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No set-up or activation fees

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7 day free trial, no credit card required

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Unlimited inbound calls

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Flexible packages

The VoIP phone system for any business

At CircleLoop we’re confident that our VoIP communication solutions are perfect for any business or any size. We have experience working with organisations of all sizes across an array of industries and can help you set up VoIP for your sales teams, call centres or internally.

Not sure it’s for you? Find out about our business VoIP solutions for…

startups
Startup Businesses
sales
Sales Teams
Established Businesses
Established Businesses
non profit
Not For Profit
Financial Services
Financial Services
Remote Teams
Remote Teams

Frequently asked questions about VoIP

What do I need for a VoIP phone system?

The point of entry for a VoIP system is low. All you need is a reliable internet connection and the software or hardware.
For CircleLoop we recommend using our desktop apps for best results, but we have mobile apps too. All you need to do is install them and you’re good to go.

Is VoIP reliable?

VoIP is as reliable as your internet connection. We think this makes it even more reliable than a traditional business landline. There are less chances for any problems that you can’t control.

Do I need a physical handset for a VoIP system?

You don’t need a desk phone or headset. You can run your calls through your desktop or smartphone mics and speakers.

For best sound quality a headset is useful and we can help there. We have Jabra headsets and can sort you out with desk phones if you need them

Shop from our hardware.

Can I port my old number to a VoIP system?

Absolutely! We are happy to help you port your old number over, whether it’s from a traditional landline or another VoIP service.

Do you need a phone line for VoIP?

No, you don’t! All you need is access to the internet. You don’t need physical wiring, but you will need to have broadband and a router.

Is VoIP cheaper than a landline?

Yes! Without the need for installation costs, engineers and hardware, a VoIP phone system can be significantly cheaper.

CircleLoop’s cloud-based phone system starts at just £5 per user per month with all its features included too, so we’re confident that it’s one of the cheapest ways to set up a business phone system.

Check out our pricing.

Can a VoIP number be traced?

Yes, a VoIP number can be traced. Even though a VoIP system allows for virtual numbers, they can still, with some effort, be traced back to the original source.

Learn more about tracing VoIP numbers.

Keeping you in the loop

Keeping you in the loop...

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