Alternative business funding – what are the options?

The face of business lending is changing quickly. New options have sprung up left and right, while high street banks are pulling back from SME lending. Recent research from iwoca found that more than half of brokers (51%) report a negative view of high street banks from SMEs.  

This reflects a longer term trend, with high street banks’ share of gross lending falling over the last three years, making up 41% in 2023. That explains why smaller businesses are increasingly looking towards a different way of securing capital – alternative business funding.

As each small business has different needs, from cash flow to van finance, refurbishment to purchased goods, it’s important to identify which type of funding could help yours. Below, we explore the world of alternative business funding and what it could mean for your business.

What is alternative business funding?

Alternative business funding, or alternative finance, is any type of funding for a business that isn’t sourced from a ‘mainstream’ provider, such as a bank. It's particularly useful for small to medium enterprises, as it doesn’t follow the same — and, often, frustrating — conventional frameworks as most high-street banks. Alternative lenders can prove to be more efficient and quicker at providing funding through more automated processes, technology integration and broader eligibility criteria.

Online lenders — such as iwoca — are designed to help independent traders and small businesses manage their cash flows and cover the purchase of larger investments. Your local coffee spot, bike repair shop and plumber can all benefit from alternative small business loans.

What are the best types of alternative business funding in the UK?

Alternative business loans

Alternative lenders are increasingly popular sources of finance for small businesses offering a wider range of finance to smaller businesses with diverse finance needs

Iwoca is a leading provider of alternative finance, providing £200m across 9,000 business loans in the UK and Germany in the first quarter of 2024. 

You can borrow up to £500,000 for 24 months to grow your business with our Flexi-Loan. There's no early repayment fees, so you can repay in less than 24 months to save on interest. Apply today and you could get a decision in one working day.

Crowdfunding

Crowdfunding is an increasingly popular way to raise money directly from the public and other small-scale investors. Those looking to gain alternative funds from crowdfunding platforms will need to provide a pitch, a business plan and cohesive points about why people should invest. The most popular names in the space include Crowdcube, Crowdrise and Crowdfunder. Each has a slightly different model, so look into whether the loans are equity-backed or reward-based.

One of the benefits of crowdfunding is being able to test potential business opportunities and ideas with potential customers, as well as encouraging smaller investments and gaining feedback as the investment window progresses. Find out more about crowdfunding in our useful guide.

Invoice Finance

Invoice finance is a way of turning outstanding invoices in your business into readily available cash. By selling your outstanding invoices to an invoice finance company, you receive a percentage of their value in advance of their payment date. Once the invoices are paid, you get the remaining balance back, minus the financing companies fees and interest.

Small business grants

Numerous small business grant and loan schemes offer alternative lending options to growing businesses. Many are government-backed. Generally, such schemes offer alternative funding at interest rates that are lower than high street banks and can provide support and mentoring opportunities from regional partners. Examples include Start Up Loans, Virgin StartUp and Startup Direct.

Government-related grants – such as Technology Strategy Board and Department of Energy and Climate Change — can be cost-efficient options, as they don’t dilute equity and, even if your grant is rejected, can provide up to 90% of funding.

P2P lending

P2P lending — or peer-to-peer lending — is a method of business funding that’s gaining popularity quickly. The lending model is based on connecting people who want to invest, with businesses seeking finance. Again, the specifics vary from platform to platform, but the basic premise is for the investors to receive their money back with added interest, and the borrowers to gain access to quick and easy funds, at a lower rate than traditional lenders charge. Platforms like Zopa, Funding Circle, Prosper and RateSetter are the established names in the space.

Example

This flow chart shows the movement of funds from individual lenders, through a P2P platform and to the borrowing business, as well as tracking the repayment of funds.

Business ‘angels’

Your business may want to consider gaining alternative funds from so-called investment ‘angels’. These are individuals with large funds readily available and eager to back projects in-line with their personal goals – such as property regeneration, community projects or simply a profitable business venture. Your business pitch will need to be watertight when it comes to gaining an individual’s interest, and savvy investors will want to see how they'll make a return on their speculation. Angel Investment Network and Angels Den are a good place to start, as is attending business angel networking events.

How much could I borrow?

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What other financing options are available?

Family & Friends

Research in 2024 from iwoca found that three in every ten (29%) small business owners in the UK have received financial backing from a family member. Of those who used funds from family, three-quarters (74%) said it was key for getting started with their business. Levels vary greatly, with over a third (36%) saying they had received more than £25,000 from their relatives, with a fifth (19%) receiving over £50,000.

Community funding

Designed to help empower SMEs by harnessing the power of tight-knit local communities, community funding has the power to use social networks and community circles to help a local business take off. Social enterprises — such as female entrepreneurs, sustainable endeavours  and companies supporting minorities — can benefit from community funding the most, as well as those looking to improve a local area or provide a service that’s been missing.

Alternative business funding FAQs

How long does alternative business funding take?

On average, high-street banks can take up to five weeks to make a decision on whether to provide a loan to a small business. When it comes to securing the cash, it can take up to three months. Online alternative funding is usually considerably quicker, and consider smaller businesses as a priority. Many offer fast credit facilities and even a same-day service.

Who can apply for alternative business funding?

Alternative business funding providers help support all manner of enterprises — from plumbers to mixologists and restaurants to retailers — who want to make their business work. You usually need to have a UK-based business and operate as a sole-trader, limited company or partnership.

Is alternative business funding good for bad credit?

Those with complicated credit histories are still eligible to be considered for most alternative funding methods and, depending on the circumstances, can still use the available tools and expertise on offer. If you have received a CCJ or have a history of missed repayments, it’s still worth applying for alternative funds.

How do I repay alternative funding?

No business runs like clockwork — there are busy periods, and there are quiet periods. Some alternative finance providers offer flexible repayments, giving customers the option to pay back less during quieter times of the year and make larger payments when things are going well. Similarly, businesses can ‘top-up’ their loan amount to bridge cash flow gaps or make further investments.

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