Alternative business funding for small businesses

UK SMEs collectively missed out on £3.6bn of funding from traditional lenders in 2021

Banks refused to lend to one third of British small businesses who applied for a loan last year.

That means nearly one million businesses faced pushback from banks, according to research by open banking provider Yolt, with the main sticking points being timing, too much debt and insufficient collateral.

Collectively, UK businesses missed out on £3.6bn worth of much-needed finance and of those businesses which did secure funding, only 20 per cent said the process was easy.

>See also: Small business finance – the complete guide

Research found the average SME sought to borrow £331,275 to help grow their business, mainly for equipment, technology and business development. However, on average, small businesses managed to borrow approximately £50,000 less than this.

In May, the FSB said that lending to small businesses hit an all-time low, with fewer small firms now applying for finance. Just nine per cent applied in the first quarter of 2022 – the lowest proportion since records began.

With a helpful boost from your bank by no means a given, what are the alternative business funding options to consider for your small business? Where can you turn to for business funding if you need an alternative?

>See also: Small business startup funding

Alternative business funding options

Invoice financing

For businesses that regularly sell to other businesses on credit terms, invoice financing could be a helpful avenue to help ease cashflow. With this alternative funding method, a lender pays you quickly – most of the time within 24 hours – for your unpaid invoices and takes a cut when the payment finally does land.

This can help accelerate business growth. However you’re banking (literally) on those clients to pay up eventually.

It is also worth noting this option is only available to B2B services, so your customers have to be other businesses and not the public.

There are two types of invoice finance. Invoice factoring, where the finance provider provides up to 90 per cent of the outstanding invoice and chases up payment from your customers directly, and invoice discounting, whereby the provider still provides a percentage of the invoice but the customer pays the business as normal.

>See also: The benefits of invoice finance

Invoice finance providers

ProviderAdvance rateRequirementsOfferingsService fee
Lloyds Up to 90 per cent, typically within 24 hoursMust have a projected annual turnover of £50,000 and over and sell to other businesses on credit termsUK-based invoice finance team who can tailor a solution to match your trading patterns and business goals. Access to an intuitive online system, so you can easily manage your invoice finance facilityRequest quote
NovunaUp to 90 per cent within 24 hoursAvailable to SMEs with a turnover of £500,000 and aboveNo hidden fees Request quote
Market FinanceUp to 90 per cent within 24 hoursMinimum annual turnover of £100,000 or annualised income from current year’s trading. Limited companies and LLPs only. Easy to use digital interface and real-time customer support. No hidden fees0.2 – 3.5 per cent
AldermoreTypically up to 90 per cent within 24 hoursAnnual turnover typically above £250,000  N/ARequest quote
Close Brothers Up to 90 per cent Minimum annual turnover of £500,000N/ARequest quote (charged as a percentage of gross turnover)
HSBCUp to 90 per cent the next working dayA projected business turnover over £500,000 (including start-ups)Ability to add credit protection to guard against late payment or bad debtsRequest quote
Metro BankUp to 90 per cent within 24 hoursAbility to end your contract with no penalty fee with just 28 days’ noticeRequest quote
Skipton Up to 90 per cent within 24 hours Invoice discounting deals for SMEs with turnovers as small as £100,000 Free credit reports on your clientsRequest quote
Source SmallBusiness.co.uk

Alternative loan and debt providers

For small businesses, business loans can be a useful boost to buy stock, equipment or assets. The monthly repayment period can span from between one to 10 years and a fixed rate can be rubber-stamped before the loan is taken out.

There are two types of business loan.

>See also: Fast business funding and loans

Secured business loans require you to put up collateral as security, meaning the lender will take over the assets if you’re unable to repay. That could mean your house or your car. The advantage of this route is interest rates are low.

Unsecured loans are easier to obtain, and don’t require the risk of losing any assets but you can expect to pay more in interest.

With banks being increasingly cautious with their loans, alternative loan providers have seen a surge in popularity, with most giving approval within 24 hours.

>See also: Best small business loans in the UK

Loan and debt providers

Provider Funding Approval turnaround RatesRepayment periodRequirements
Funding Circle£10,000 to £500,000As little as five hoursFrom 3.9 per cent per year2 to 6 yearsMust have been trading for at least two years. £16,700 minimum turnover per year
Capify£5,000 to £500,000Approval in under 60 secondsFlexible – request quote3 to 18 months Monthly turnover of £10,000 and over and must be a limited company trading for at least 12 months
Iwoca£1,000 to £500,00024 hoursFlexible0 to 6 monthsN/A
Fleximize£5,000 to £500,00024 hoursRates of 0.9 per cent to 2.9 per cent (from 10.8 per cent per annum)12 to 48 monthsMust have been trading for at least 12 months
Cubefunder£5,000 to £100,000Within 48 hours Flexible3 to 12 months Minimum turnover of £50,000 per year. Must be a limited company in England and Wales that has been trading for at least three months
Source: SmallBusiness.co.uk

Merchant cash advance

If your business takes card payments with a card terminal, it is possible to get that cash quicker using merchant cash advance.

Unlike a traditional bank loan, there are no interest rates or fixed monthly payments. Instead, you pay the provider a percentage of future card revenue. If your business takes in less cash one month, this is reflected in the repayment and you pay less. If the business has an above-average month, be prepared to fork out a bit more.   

This option is a fast way of landing funding. The time it takes between a customer buying a product and that money becoming available in your bank on average in the UK is three business days with a payment processor. By using merchant cash advance, that cash could be available within 24 hours.

>See also: Is your business a good candidate for merchant cash advances?

Merchant cash advance providers

ProviderFunding RequirementsRepayment period Approval turnaround
365 Business Finance£10,000 to £300,000 Monthly card sales of £10,000 and overTypically six to 10 monthsWithin 24 hours
Newable Finance £10,000 to £1m Must have been trading for six months or more and receive a monthly card sales of £5,000FlexibleWithin 48 hours
Capify £5,000 to £500,000 and over Card sales of £5,000 per month. Majority of payments must be through a card terminalFlexibleN/A
Merchant Loan Advance £3,000 to £300,000Must be trading for approximately three months and turning over more than £2,500 in card sales a monthFlexibleWithin 24 hours
SME Loans £5,000 to £500,000 The business must have been trading for at least six months.FlexibleWithin 24 hours
Monthly average card sales must total a minimum of £5,000
Nucleus From £3,000 up to £2mMust have been trading for a minimum of four monthsFlexibleTypically within 24 hours
Source: SmallBusiness.co.uk

Peer-to-peer lending

Peer to peer lending, commonly known as P2P lending, allows borrowers to be matched with individual lenders for quick and flexible loans at competitive rates via a P2P platform. 

Once the borrower discloses the amount they’re looking to borrow and desired repayment period, the platform will do the background work, such as checking credit scores, before matching a borrower with a lender.

An advantage of going down the P2P route is a decision on whether you can be granted funding can be made almost instantly, with the loan becoming available in a matter of days.

See also: Peer to peer lending: A small business guide

Peer to peer lending providers

Provider Loan range Interest rate Approval turnaroundCommitment term
Funding Circle £10,000 to £500,000From 3.9 per cent As little as five hours. Funds within 24 hours From 2 to 6 years
Assetz Capital Up to £2.5m (SME secured loan) 5.75 per centWithin 24 hoursUp to five years
Crowd2Fund£25,000 to £1m6 to 15 per centN/AFrom 1 to 5 years
Funding Knight £250,000 to £1m Typically between 8.75 per cent and 12 per cent Within 24 hoursFrom 6 months to 5 years
Source: SmallBusiness.co.uk