Best 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 your business plan does not meet the lender’s requirements.

Fortunately, several alternative options 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.

Top 10 business funding alternatives

1. 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. Businesses can then borrow what they need when they need it and repay the balance 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 lost 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 interest rate for a longer period, 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 interest rates, so you’ll need to clear the balance each month.

Pros

  • Flexible line of credit so you can borrow when you need to
  • Repayments are not fixed
  • You may benefit from 0% spending for a set time
  • Some business cards offer rewards or cashback
  • Employee cards available

Cons

  • Interest rates can be high
  • Credit limits are lower compared to a loan
  • You’ll need a good credit rating to get the best deals

Best for: Businesses that want to spread the cost of an expensive purchase or only borrow from time to time.

2. Merchant cash advance

With a merchant cash advance, 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. If business is booming, you’ll pay more, but during months when business is quieter, you’ll pay less.

Pros

  • Can be easier to get accepted for than other forms of borrowing
  • Repayments fluctuate in line with your income
  • You can get your funding fast

Cons

  • Can be hard to predict future sales
  • Can be an expensive way to borrow

Best for: Small businesses that accept debit and credit card payments from customers.

3. 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, advances you a large percentage of the invoice value upfront – typically up to 95%.

The invoices act as collateral, and when the invoices are due, the bank collects the amount owed directly from the customer. The lender then pays you the remaining balance minus any fees and charges. These fees depend on the lender and the loan’s terms.

Pros

  • Can enable you to get paid faster and improve cash flow
  • No risk to assets

Cons

  • Can be more expensive than other forms of borrowing
  • Your overall profit is reduced in the short-term

Best for: Small- to medium-sized businesses that need to improve their cash flow fast.

4. 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 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 might be able to continue renting, buy the item for an agreed price or return it.

Pros

  • Flexible repayment options
  • Faster way to acquire assets
  • Minimal upfront costs

Cons

  • If you miss a payment or default, the lender might take back the asset
  • Can be more expensive than buying an asset outright
  • You could end up paying for an item you never actually own

Best for: Businesses that need the latest machinery or technology they wouldn’t be able to buy outright.

5. Government grants

A government grant is an amount of money awarded to a business to help it grow. Unlike a traditional business loan, this money doesn’t need to be repaid. There are hundreds of grants in the UK aimed towards different business requirements, including small and startup businesses. Some are also awarded to businesses by other companies.

Pros

  • Grants can provide a significant source of funding
  • The money doesn’t need to be repaid

Cons

  • Highly competitive process
  • Grants often have specific eligibility criteria, such as your business size, where you’re based and the sector you’re in

Best for: Businesses with the time to apply and write a solid business grant proposal. You’ll also need to ensure you meet the eligibility requirements.

6. 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 can buy shares in your company. All equity crowdfunding platforms are regulated by the Financial Conduct Authority (FCA).

Pros

  • Can raise a lot of money for your business
  • Can help raise your business profile

Cons

  • Can take a while to get accepted onto crowdfunding platforms
  • Many crowdfunding appeals are not successful

Best for: Businesses with good growth potential and are offering an innovative idea – if your business model is fairly traditional, crowdfunding might not be for you.

7. 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.

Pros

  • Angel investors can offer their skills, knowledge and contacts, as well as money
  • No regular repayments to make
  • Many are happy to invest in early stage businesses

Cons

  • You’ll need to give away a share of your business
  • Can take time to find someone who wants to invest in your business

Best for: Startups and early stage businesses looking for both funding and expertise.

8. 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 with the potential for long-term growth.

Pros

  • Large amounts of capital can be raised
  • No regular payments to make
  • Can offer valuable support and guidance

Cons

  • You’ll need to give away a share of your business
  • Your investors will have a say in how you run your business
  • Can take a while to find the right investors

Best for: Small businesses showing good growth potential with a strong brand and team in place.

9. Peer-to-peer lending

Peer-to-peer (P2P) lending allows you to borrow money from other individuals through a P2P online platform. It can enable borrowers to get cheaper interest rates than a traditional loan, while investors can earn a better return than a standard savings account.

Pros

  • Better interest rates available
  • Can be a convenient and fast way to borrow funds
  • Businesses with lower credit ratings might still be able to borrow

Cons

  • You might have to pay additional fees
  • If you default on the loan, you might not get the same protection as you would with a traditional lender

Best for: Businesses looking for a cheaper alternative to a traditional business loan, or businesses that traditional lenders have declined.

10. Family and friends

Borrowing from friends and family can be a much cheaper option than applying for a traditional loan. But whether you can depends on whether you have friends or family prepared to invest some of their cash into your business.

If you do, it’s crucial to have an official written agreement in place that states whether the money is a loan, investment or gift. If you are to repay the money, it must also state how this will be done and what happens if you can’t meet these repayments.

Pros

  • Can be cheaper than a traditional loan
  • Can be more convenient than applying for funding with a lender

Cons

  • You might have to give your friends/family a stake in the business
  • If things go wrong, your relationship could be at risk

Best for: Those with friends or family willing to invest in the business and those confident their business will be successful (perhaps you have previous business experience, for example).

What business funding is available in England and Wales?

All of the above options are available to businesses in England and Wales, but the type of business grants you can apply for might differ.

You can use the business finance locator to find out what options are available in Wales, while the gov.uk website lists finance and support options for businesses in England and the UK.

Bottom line

Borrowing funds to help your business expand, buy new equipment or even improve cash flow doesn’t have to involve applying for a traditional business loan. There’s a whole host of different ways to get access to funding for your business, so it’s worth taking the time to compare your options and assess which works best for you.

Frequently asked questions

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