There are several alternatives to business loans, including the likes of angel investors, peer-to-peer lending, and asset finance. These come with many benefits over traditional bank loans, such as quicker approvals and easier application processes.
Read on as we detail the leading business loan alternatives.
Types of Alternative Funding Options for Businesses
The number of online platforms for alternative finance increases by 25% every year. Here are some of the main alternative funding options for businesses:
Angel investors
An angel investor is someone who invests in a start-up business in exchange for a small percentage of equity. Generally, an angel investor expects a minority stake worth between 10% and 25%. Angel investors are individuals with a high net worth and entrepreneurial experience. They may provide support through regular payments or one lump sum.
To get the most out of this investment, angel investors will likely provide business suggestions to improve the cash flow of the company. Their goal is to profit from the equity share once the value of the business increases.
Finance examples
- Angel Investment Network – An online database where business owners can look for angel investors.
Crowdfunding
Crowdfunding is the act of using an online platform to request funding donations. These campaigns can be used to support your business finances generally, or be set up with a specific cause in mind.
Crowdfunding sometimes works as an equity investment, where businesses provide all donors with a minority stake in the company. Other companies may offer a service discount or a reward to investors.
Finance examples
- Kickstarter – A crowdfunding platform where users can set a funding goal and deadline.
- Indiegogo – A crowdfunding site used by many business owners for raising start-up funds.
Peer-to-peer lending
Peer-to-peer lending works almost exactly like bank loans, except the funding comes from other businesses. Small businesses can submit an application detailing how much funding they require. An investor will then supply the company with the loan, with a fixed return and interest rate set.
Peer-to-peer lending is preferred by business owners who do not want to give away company shares in order to attain funding.
Finance examples
- Funding Circle – A peer-to-peer lending site that offers unsecured loans of £10,000 to £500,000.
Secured business loans
A secured business loan is a form of asset-backed lending whereby a lender provides a business with a collateral-backed loan. Your business assets are used as a form of security, which the loan provider can take should you default on repayment. Secured loans are often a requirement of bigger loan requests.
Finance examples
- Capify – An alternative business funding company that offers secured business loans starting from £5,000.
- Funding Circle – This site offers secured loans up to £1 million.
Unsecured business loans
Unsecured business loans do not need to be asset-backed. They are a preferred option for those who cannot afford to risk using their assets as collateral or simply don’t possess valuable assets. Unsecured loans may have higher interest rates than secured loans and may require a personal guarantee.
Finance examples
- Funding Circle offers between £10,000 and £500,000 in unsecured loans, which debtors can pay back in fixed monthly payments.
Government grants
Attaining a government grant is highly beneficial to start-up business owners as, unlike a bank loan, it does not need to be paid back. They are issued to help business owners focus on growth rather than repaying the loan.
A government grant can be used for a variety of reasons, from buying equipment to covering rent. In some instances, the business owner may have to invest an amount equal to the grant.
Finance examples
- Small business owners can find several regional government grant options on the Business Finance Support Finder. There are over 200 different types of government grants available in the UK.
Invoice finance
Invoice finance loans are a means for businesses to stay on top of cash flow issues. Invoice finance lenders, such as Close Brothers, can lend money based on a percentage of an unpaid invoice. The value of the invoice itself acts as collateral. When the invoice has been paid, the business owner can return the loan to the creditor.
Invoice finance loans can be helpful if your business regularly experiences a gap between completing a job and receiving payment. The loan can help to cover overhead costs and wages in the meantime. The size of the loan depends on the provider, but invoice finance loans generally cover the majority of the invoice value.
Finance examples
- Close Brothers – This wealth management service can provide an invoice finance loan worth 90% of all outstanding invoices.
Merchant cash advance
A merchant cash advance is a bank loan alternative with a flexible repayment scheme. A business can receive a merchant cash advance to cover business expenses, which can be paid back over time as a percentage of each card transaction sale. This means that a set monthly payment does not hamper cash flow. Instead, the repayment rate is flexible depending on how profitable the business is each month.
Finance examples
- Merchant Cash Express – This trusted merchant cash advance provider offers a maximum advance of £500,000.
Asset finance
Asset finance is a loan that covers the cost of business equipment, machinery, or materials. The asset itself acts as the collateral, and the payment is normally expected back within the lifetime of the item(s) bought.
Finance examples
- Asset Finance UK – This company specialises in finance loans to cover company cars, commercial vehicles, factory machinery, and equipment.
How Do Alternative Business Loans Differ From Traditional Business Loans?
Alternative business loan providers are more likely to take risks with start-up companies than high street banks. They are generally happy to give loans to businesses with little credit or few assets to offer as collateral.
Alternative business loan providers also have far quicker turnaround times. Approvals can be granted within hours of a loan application submission, and money can be made available within 48 hours. On the other hand, banks can sometimes take as long as 12 weeks to approve and provide a loan.
On top of conducting more vigorous financial checks, bank loans are more likely to require collateral. A poor credit score could also limit the size of the bank loan offered.
What Can I Use an Alternative Business Loan For?
You can use alternative business finance to help all your business needs, whether you need to cover start-up costs or avoid insolvency. The main uses of business finance include covering the costs of new equipment, business expansion, overheads, research and development, and debt consolidation.
Purchasing inventory is amongst the most common uses of bank loan alternatives, particularly for small and medium-sized enterprises (SMEs) who wish to increase their production rate and efficiency but do not have the funds to do so. In some instances, the inventory bought can work as collateral in the loan agreement.
Business expansion is another common usage for funding alternatives, which could entail moving into bigger premises, hiring more staff, or putting more money into marketing.
Do I Qualify for Alternative Business Funding?
Alternative lending is not limited to a certain type of business. Any level of business can apply for it, from start-ups to established enterprises. All legal types of companies can, too, apply for alternative finance, including LLP’s, partnerships, limited businesses, and sole traders.
For most of the financing options listed in this article, your business will need to be UK-registered. Besides that, alternative loan qualifications are case-specific. For example, Funding Circle only offers finance to companies with two years of trading history.
To qualify for funding from Merchant Cash Express, your business needs to have over six months of trading history and make over £5,000 a month in card transactions.
How Can I Apply for Alternative Business Finance?
Each alternative business finance provider has its own application process. For such sites as Capify, business owners can get a quote for their business within 60 seconds. If accepted, the rest of the application can be completed over the phone.
Merchant Cash Express provide a pre-approval to your funding application in under 10 minutes and can provide funding within 48 hours.
Applicants will generally have to state the following:
- Company name.
- The level of business finance required.
- Term required.
- The business sector.
- Business address.
- Business legal status.
- Planned use for the business loans.
- Trading history.
- Annual turnover.
What Are the Pros and Cons of Alternative Business Funding?
Pros:
- Loan repayment is generally more flexible. For example, merchant cash advances are paid back through a percentage of each transaction you make. This means that, should you experience a month of quiet trade, your cash flow is not hampered by fixed repayments.
- Alternative business funding is open to everyone. No matter the line of business you are in or whether you operate as a partnership, limited company, or sole trader, alternative business loans are an option to all.
- Alternative loans are available at a much faster rate than bank loans.
Cons:
- Alternative financing tends to come with higher interest rates than bank loans. This is to make up for the quick application process and fewer approval requirements.
- Alternative loan providers are less secure than banks and therefore have a higher risk of going out of business.
Can I Get an Alternative Business Loan If I Have a Bad Credit Rating?
Alternative business loan providers are more likely to be favourable towards small businesses with a bad credit rating than a high street bank. This is because they are more likely to judge your trustworthiness based on a host of factors in addition to your credit score. This can include your sale history, projected profits, customer testimonials, and even your social media interactions.
Through this, the loan provider gains a greater sense of the risk involved in providing you with business funding. A high street bank will likely judge you primarily on a poor credit rating. For this reason, alternative business loans are the best option for those with bad credit ratings.
FAQs
What are the risks of alternative business funding?
The main risk of alternative business funding is being unable to keep up with the high-interest rate repayments and defaulting. Other risks of alternative business finance include the loan provider going out of business.
Will I need to provide collateral to secure an alternative business loan?
Alternative business loans tend to have a less stringent application process than bank loans and generally do not require collateral. If the alternative finance is used to purchase inventory, then the materials bought may act as collateral.
Are alternative business loan providers regulated by the FCA?
The FCA regulates some types of bank loan alternatives, including angel investors, peer-to-peer lending, and crowdfunding. However, other types aren’t FCA regulated, such as merchant cash advances and invoice financing.
How long does it take to receive my alternative business funding?
Alternative business funding tends to get processed and delivered a lot faster than bank loans. Although wait times differ, it’s possible to get alternative business funding within a couple of days.
Final Thoughts
Alternative funding options are increasing every year, with more businesses turning away from traditional methods of loan attainment. This is mainly due to the benefits that alternative loan companies provide UK businesses, with less focus on credit scores and greater repayment flexibility. Generally, loan alternatives can be easier attained than bank loans for small business owners.
However, alternative funding does come with some drawbacks, including increased interest rates and loan providers having less stability than high street banks.