Business loan alternatives

We explore some of the alternatives to using a business loan to help give your business a cash injection.

If you’re a small business, certain types of funding won’t always be available to you and they might not even be suitable.

Traditional business loans, for example, aren’t always easy to get accepted for, particularly if your business has yet to establish a credit history or if your business plan does not meet the lender’s requirements.

Fortunately, there are a number of alternative options that could give your business the cash injection it needs without taking out a traditional business loan. We’ve outlined some of the main business loan alternatives below.

Business credit cards

A business credit card can offer one of the most flexible ways to borrow money and can be a useful way to manage cash flow. It provides businesses with a line of credit up to a set amount, enabling them to borrow what they need, when they need it, and repay it in flexible monthly instalments. Unlike a business loan, these repayments are not fixed.

Business credit cards usually have a higher credit limit compared to personal credit cards as they are based on your company’s income. Some business credit cards also won’t charge any interest on your purchases for a few months. This can be useful if you need to spread the cost of a piece of equipment or deal with an emergency, for example.

Interest-free periods won’t be as long as they are for personal credit cards, but it can still give you some breathing space. Just make sure you pay off the balance in full before the 0% deal ends and interest kicks in.

Other business credit cards charge a low rate of interest for a longer period of time, which can give you a more affordable option if you need to pay off spending over several months. Others, still, are designed for businesses with poor credit and can help you get your business credit score back on track. However, they tend to charge high rates of interest so you’ll need to clear the balance each month.

Capital on Tap Business Credit Card

Capital on Tap Business Credit Card

  • Get up to £250,000 to grow your business.
  • Earn 1% cashback for every £1 spent.
  • Enjoy up to 56 days interest-free on purchases.
  • No application fees or non-sterling transaction fees.

Representative example: When you spend £1,200 at a purchase rate of 26.4% (variable) p.a., your representative rate is 29.9% APR (variable).

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Merchant cash advance

Merchant cash advances are best suited to small businesses that accept debit and credit card payments from customers.

A lump sum is advanced to your business based on your future card sales. You then repay the amount borrowed as a percentage of your customers’ card payments using a card terminal. The amount borrowed is repaid with fees but repayments fluctuate in line with your income. This means that if business is booming you’ll pay more, but during months where business is quieter, you’ll pay less.

Merchant cash advances can be easier to get accepted for, but the drawback is that it can be hard to predict future sales.

Invoice financing

Invoice financing is a way of borrowing money based on what your customers owe you, helping you to get paid faster. Rather than waiting for invoices to be paid, a third party, usually a bank, will advance you a large percentage of the invoice value upfront – typically up to 95%.

When the invoices are due, the bank will collect the amount owed directly from the customer, and then pay you the remaining balance minus any fees and charges. The invoices themselves act as collateral and fees vary depending on the lender and the length of the loan.

Asset financing

This option enables you to access business equipment, machinery and vehicles without the need to pay for them upfront. The 2 most common forms of asset finance are hire purchase and lease financing.

With hire purchase, the provider retains ownership of the asset which is leased to your business over a set term in return for fixed payments, plus a deposit. At the end of the agreement, you will own the item outright.

With lease financing, the lender buys the item you need and you rent it back from them for a fixed monthly fee. At the end of the term, you may be able to continue renting, buy the item for an agreed price or return it.

Government grants

A government grant is an amount of money awarded to a business to help it grow. The money does not need to be repaid. There are hundreds of grants in the UK that are aimed towards different business requirements, including small and startup businesses. Some are also awarded to businesses by other companies.

Crowdfunding

Equity crowdfunding enables you to raise funds for your business from several investors. To do this, you must list your business on an online platform where investors and members of the public will be able to buy shares in your company. All equity crowdfunding platforms are regulated by the Financial Conduct Authority (FCA), but the downside of this option is that it can take a while to get accepted on to these platforms.

Angel investors

Angel investors, or business angels, are high-net-worth private individuals who invest their own funds into a small business in return for a minority stake – typically between 10% and 25%. It might be a one-off investment or they might offer several cash injections spread out over time. Angel investors can also offer valuable business support.

Venture capitalists

Venture capitalists also invest money in businesses in return for equity, but unlike angel investors, the money is usually pooled from several investors. Venture capitalists typically look to fund startups that have the potential for long-term growth.

Frequently asked questions

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