Access to finance plays a key role for small and medium-sized business owners, especially during challenging times. While using available cash may work in some cases, most small businesses need additional funds to reinvest, expand, or even stay afloat. To manage cash flow and allocate capital efficiently, business owners turn to a variety of business funding options.
Historically, high street banks have been a primary source of funding. But due to recent economic shifts—both global and local—these banks have significantly reduced their appetite for risk. UK Finance’s latest Business Review shows that gross lending by major high street banks fell to £3.7 billion in Q1 2023, marking its lowest point since the pandemic.
You may have encountered numerous webinars and articles detailing what traditional lenders look for in applicants. However, despite all the guidance, the application process remains lengthy, demanding, and doesn’t always end in approval.
What Are Your Options Beyond High Street Banks?
Today, SMEs have access to a wide range of alternative finance solutions beyond traditional banks:
- Finance brokers
- Challenger banks
- Online lending platforms
- Hybrid lenders that combine multiple services
As competition among non-traditional lenders grows, the choice can feel overwhelming. Each lender has its strengths, so it’s important for business owners to identify what matters most to them.
Some businesses prefer lenders with sector-specific experience who truly understand their operations. Others prioritize speed, valuing an efficient application process, minimal paperwork, and digital contract signing.
With the Bank of England’s base rate at 5.25% and inflation remaining high, the cost of borrowing has become a key consideration when choosing the right funding method.
What Types of Business Funding Options Exist?
SMEs now have access to diverse funding tools beyond standard loans. According to UK Finance’s Annual Business Review, the use of invoice finance and asset-based lending (ABL) increased significantly last year. Many companies are also combining different products to fund various operational needs.
Let’s explore common types of finance solutions:
🔹 Commercial Loans
Used for working capital, expansion, or general business development. These may require collateral or Personal Guarantees (especially for Limited companies). Larger amounts may also need Debentures.
🔹 Asset Finance
This allows businesses to spread the cost of expensive equipment over time. Lenders assess the asset category—category 1 assets (e.g., vehicles, machinery) are lower risk and more favorable than category 4 assets.
🔹 Invoice Finance
Unlocks funds tied to unpaid invoices, often for periods between 60 to 120 days. This helps businesses improve cash flow while retaining control over debtor relationships and collections.
🔹 Asset-Based Lending (ABL)
Lets businesses borrow against multiple assets—receivables, inventory, machinery, or real estate. ABL is flexible and adapts well to seasonal fluctuations or business cycles.
🔹 Supply Chain Finance
Also known as reverse factoring, this solution helps businesses pay suppliers promptly while extending their own payment terms with the finance provider stepping in.
🔹 Merchant Cash Advances & Revenue-Based Financing
These are innovative alternatives for businesses with high card sales or recurring revenue. Repayments are flexible and tied to business performance.
Understanding the Loan Structure
Loan Duration
Loan terms typically range from 3 months to 5 years, depending on the product and lender.
Loan Size
Financing can start as low as £5,000 and go up to several million pounds, depending on the lender’s policies and the business’s financial health.
Loan Costs & Interest Rates
With rising interest rates, borrowing is now more expensive. Lenders also factor in credit risk, industry stability, and business history when determining rates. That’s why submitting a strong, well-structured funding proposal is essential.
Layered Financing: A Smarter Way to Borrow
Many businesses are adopting layered financing strategies—for example, combining invoice finance with a short-term working capital loan. This improves the chances of approval and ensures the business has access to funds when and where needed.
Also, marketing-specific loan products—like 0% interest finance for product sales—are becoming part of pricing strategies to drive customer demand and scale sales.
Where Should You Start?
Here’s a simplified roadmap when considering raising capital or borrowing to grow your business:
1. Know Your Lender
Choose a lender that understands both your industry and the financial products they offer. A good lender will take time to assess your business model and tailor a solution that fits your needs.
2. Identify the True Purpose
Clearly define why you need the loan. Whether it’s to bridge a seasonal gap or fund a long-term expansion, the more precise you are, the better the lender can match a product.
3. Select the Right Loan Type
Not all lenders offer every product. Be sure to match your need with the loan’s structure, rate, and term. Flexibility is key.
4. Consider Total Cost
Beyond interest rates, check for hidden fees, early repayment penalties, or setup charges. Partnering with a transparent, full-market lender can help keep borrowing affordable and aligned with your business goals.
Conclusion
In a climate of economic uncertainty and cautious bank lending, UK SMEs must explore business funding options beyond traditional routes. From asset-based lending and invoice finance to hybrid lending models, the landscape is full of opportunities.
Working with an experienced alternative finance provider who understands your industry, offers flexible solutions, and supports your growth journey is key to long-term financial success.
