When the Bank Says No to Your Loan Application Alternative Sources of Funding for Small Businesses in the UK

Small businesses are the backbone of the UK economy, and yet accessing funding opportunities has been a consistent challenge. Many small-business owners have found it increasingly difficult to access capital from traditional banks, but with the concentration of non-traditional financing options available, raising capital is now more accessible than ever before.  

In this article, we look at some of the alternative sources of financing that are available for small businesses in the UK.  Firstly, a word about finance brokers.   

Using a Finance Broker 

The benefits of using a finance broker for sourcing finance in the UK are significant. Finance brokers are experts in the financial industry and provide a range of services to small businesses seeking financing options. Finance brokers are consultants who work with small businesses to assess their financing needs and connect them with the most suitable financing options available in the market.  

Expertise: 

Finance brokers are experts in the financial industry and have an in-depth knowledge of different financing options available in the market, including bank loans, invoice financing, and asset finance. Clients can leverage that expertise to find the best financing options that match their specific business needs. 

Access to a Wide Range of Lenders: 

Finance brokers have access to a wide range of lenders, including traditional banks, private lenders, and crowdfunding platforms, to name a few. As a result, they can offer clients a diverse range of financing options that cater to each business’s unique requirements.  

Saves Time and Money: 

Finance brokers save small businesses time and money by simplifying the financing process. Finances brokers handle the paperwork and liaise with lenders on behalf of their clients, freeing up valuable time for businesses to focus on other aspects of their operations. 

Personalised Service: 

Finance brokers offer personalised services to each client they work with. They assess the specific financing requirements of each client and search for options that are tailored to their needs. The brokers typically find suitable financing options that their clients may not have been aware of.  

Using a finance broker for sourcing finance offers several benefits to small businesses. By leveraging their expertise, extensive lender network, and personalised services, finance brokers can help small businesses access the right financing options that are affordable, flexible, and well-suited for their business needs. This service can help small businesses save time and money while acquiring the financing they need to grow and achieve their objectives. 

Peer-to-Peer Lending 

Peer-to-peer (P2P) lending enables businesses to borrow from a pool of individual investors registered on a lending platform. The borrower's profile and loan information are then shared with lenders, who can decide if they want to invest in the loan or not. The platform disburses the loan when enough investors commit to the loan. These loans may be unsecured or secured, and interest rates on these loans are influenced by the strength of the borrower's credit profile.  

The lending process is typically simple and straightforward for small businesses. It offers businesses a faster and more streamlined funding process than traditional banks, and borrowers also benefit from less stringent loan requirements.  

Benefits of Peer-to-Peer Lending for Small Businesses: 

P2P lending has several advantages over traditional bank loans, which include: 

1. Higher approval rates: Traditional bank loans often require high collateral, a lengthy application process, and rigid eligibility requirements that exclude several small businesses. P2P loans have a higher approval rate, and businesses with weaker credit profiles can still get loans. 

2. Faster loan approval process: Banks usually take several weeks or even months to process loan applications. P2P lending platforms offer faster loan approval, often in a matter of days, thus saving small businesses time and money. 

3. Competitive interest rates: P2P loans offer competitive interest rates, especially for businesses required to pay higher rates on traditional bank loans.  

4. Flexible repayment options: P2P loans provide small businesses with flexible repayment options that align with their cash flow, repayment terms can vary from a few months to years. 

UK Peer-to-Peer Lending Platforms: 

The P2P lending market in the UK is very competitive, with several P2P lending platforms offering loans to small businesses. Some of the prominent platforms are: 

1. Zopa: Launched in 2005, Zopa is one of the most established P2P lending platforms in the UK. It offers unsecured personal loans and business loans with a maximum loan amount of £250,000. 

2. Funding Circle: Launched in 2010, Funding Circle is another popular P2P lending platform in the UK. Its primary focus is on small business loans, with a maximum loan amount of up to £500,000. 

3. RateSetter: RateSetter is a P2P lending platform that offers loans to individuals and small businesses. The platform boasts of competitive interest rates and no early repayment fees. 

4. LendInvest: LendInvest is a P2P lending platform that specializes in short-term bridging loans for property developers. The platform offers loans of up to £2 million. 

Eligibility Criteria: 

To be eligible for a P2P loan, a small business must meet the following criteria: 

1. The borrower should be a UK resident 

2. The business should be registered in the UK  

3. The borrower must provide proof of identity, three years of filed accounts and bank statements for the past six months  

4. A minimum annual turnover of £50,000+ in most cases regardless of the lender's specific requirements. 

5. The business must operate for at least two years, in some cases, new businesses with strong profiles can get loans.  

Peer-to-peer lending has become an increasingly popular option for small businesses in the UK looking for alternative financing options. P2P lending platforms offer small businesses faster and more flexible funding options than traditional banks. By weighing the pros and cons, UK small businesses can decide whether P2P lending is the right choice for them. 

Crowdfunding 

Crowdfunding is a financing model that enables small businesses to raise capital from a group of individuals through online platforms. The model’s popularity has grown significantly over recent years, with UK-based crowdfunding platforms raising vast amounts of money for early-stage businesses. Crowdfunding has brought a wave of democratization to the funding of new ideas. Small businesses can raise capital through three primary models: donation-based, reward-based, and equity-based crowdfunding. 

Types of Crowdfunding: 

Crowdfunding can be done in several ways: 

1. Donation-based crowdfunding: In this model, businesses raise funds in exchange for pledgers receiving nothing back ('reward.' This type of funding strategy is often used for charitable purposes or artistic projects. 

2. Rewards-based crowdfunding: This type of crowdfunding raises capital through presales, where crowdfunding backers invest in a product at a discounted rate and, in return, receive a physical reward once the product is built that holds value or offers some incentives. 

3. Equity crowdfunding: In this model, businesses trading shares raise capital, and investors invest in return for equity ownership, owning a piece of the company. 

Best Crowdfunding Platforms for Small Businesses: 

Several crowdfunding platforms operate in the United Kingdom that small businesses can use to raise capital. Some of the best crowdfunding platforms in the UK are: 

1. Kickstarter: Kickstarter is ideal for creative projects and aims to help creators launch new products.  

2. Seedrs: Seedrs offers equity-based Crowdfunding for small businesses and tech start-ups.  

3. Crowdfunder: Crowdfunder is a donation and rewards-based platform, although it also offers equity investment options.  

4. Indiegogo: Indiegogo is a global Crowdfunding platform that enables small businesses and entrepreneurs to get ideas financed. 

How to Launch a Crowdfunding Campaign: 

Crowdfunding platform success often hinges on the effectiveness of the crowdfunding campaign. If you intend to launch a crowdfunding campaign for your small business, here are the steps to follow: 

1. Determine Goals and Set Objectives: Set goals and objectives that you want your crowdfunding project to achieve and ensure they are both specific and measurable. 

2. Build a Clear and Compelling Story: Tell your story; make sure it is upfront and straightforward. 

3. Create a High-Quality Video: A creative video that conveys the business's vision and message should complement the story. 

4. Set a Funding Goal: Consider strategically setting a funding goal that moves the campaign forward. 

5. Promote the Campaign: Make use of social media platforms such as Twitter, Facebook, LinkedIn, and more to create awareness about the campaign. 

6. Monitor and Analyse the Campaign: Keep tabs on the campaign's performance and adjust along the way to ensure you hit your fundraising targets. 

Crowdfunding offers an excellent option to raise funds for small businesses in the UK. With three main types of crowdfunding models available, businesses can pick the most effective model that aligns with their goals. With various Crowdfunding platforms available, small businesses should choose the one that suits their business objective, and with a well-crafted Crowdfunding campaign, small businesses can realize their goals and receive funding to grow their businesses. 

Microloans 

Microloans are ideal for small businesses that require smaller loan amounts. The UK government offers microloans as part of its Start-Up Loan scheme, launched in 2012, which provides entrepreneurs with up to £25,000 to start or grow their business. The program is designed to provide low-cost loans to businesses that have been unable to secure traditional bank financing. 

The Start-Up Loan scheme works by financing loan applications using various delivery partners. The government subsidises the loan's interest rate and underwrites part of the risk to make this alternative funding accessible for small businesses. 

Eligibility Criteria: 

To qualify for the Start-Up Loan Scheme, small businesses in the UK must meet the following eligibility criteria: 

1. The business must be a UK resident. 

2. The borrower must be at least 18 years old. 

3. The business should be in its early stages, just starting up, or in its first two years of trading. 

4. The borrower must be a permanent UK resident. 

5. The borrower must provide a comprehensive business plan, cash flow forecast model, and a clear assessment of the available market. 

Benefits of Microloans for Small Businesses: 

Microloans offer various benefits to small businesses, including: 

1. Accessibility: Microloans provide small businesses with a source of funding that would not otherwise be available from traditional banks. 

2. Low-Interest Rates: Microloans offer lower interest rates than conventional loans, which reduces the overall cost of borrowing for small businesses. 

3. Flexible Repayment Schedules: Microloans offer more flexible repayment schedules, which can align with the business’s operational cash flow. 

4. Faster Approval: Small businesses can access microloans much faster than traditional loans. 

Types of Microloans: 

The Start-Up Loan scheme and other microloan providers offer various types of microloans, including: 

1. Start-Up Loans: These loans are designed for small businesses in their early stages or those that are just starting up. 

2. Growth Loans: These are loans designed for small businesses that have outgrown their initial financing and require additional funds to grow. 

3. Working Capital Loans: These loans are designed to help small businesses improve their cash flow and maintain their operations.  

4. Equipment Finance Loans: These loans are designed to help small businesses purchase equipment required to run the business.  

Microloans are an excellent financing option for small businesses in the UK. With the Start-Up Loan Scheme and other microloan providers available, small businesses can access funds that are typically hard to obtain from traditional banks. Microloans offer lower interest rates, flexibility, and faster approval times. By meeting the eligibility criteria and applying for the appropriate type of loan, small businesses can successfully use microloans to grow their businesses and achieve their goals. 

Government-Backed Schemes 

The UK government offers several schemes aimed at supporting small businesses. This section explores some of the most popular government-backed financing options available. 

The Enterprise Finance Guarantee (EFG): 

The Enterprise Finance Guarantee (EFG) is a UK guarantee scheme that enables businesses that are unable to obtain traditional bank loans to access finance from banks, and other commercial lenders. It is a government initiative that provides loans of up to £1 million to viable small and medium-sized businesses that are unable to secure finance through traditional methods.  

The British Bank’s Business Expansion Scheme: 

The British Bank’s Business Expansion Scheme (BBES) was a UK government initiative. British Business Bank Investments Ltd (BBBIL) manages the scheme, which helps SMEs in the UK to become more efficient and grow. The scheme was designed to provide a long-term patient capital to high-growth SMEs.  

The Regional Growth Fund: 

The Regional Growth Fund (RGF) is another UK government initiative to support local businesses with funding. It is a discretionary grant scheme that provides financial support to various business sectors that aim to grow the economy in their region. The RGF programme began in 2010 and has since been expanded with different rounds of funding until 2017.  

The Seed Enterprise Investment Scheme (SEIS): 

The Seed Enterprise Investment Scheme (SEIS) is a UK-based government initiative to encourage entrepreneurship and investment in small businesses. It is designed to help early-stage businesses access finance from investors by providing them with tax relief. Since the scheme's inception in 2012, it has helped several SMEs across the UK raise money and grow their businesses. 

The UK government offers various initiatives aimed at supporting small businesses with their financial needs. By meeting the eligibility criteria, small businesses can get financial support through these schemes, which offer various benefits such as lower interest rates, faster approval times, and flexibility. Businesses can evaluate these schemes to determine which scheme best meets their specific goals. 

Alternative Business Finance Providers 

Alternative finance providers are relatively new to the UK market, but they are becoming increasingly popular among small businesses seeking to raise capital outside traditional banks.  The providers primarily offer financing options that are either not available, expensive or not suitable to small businesses looking for funding from traditional banks and financial institutions.  

Benefits of Alternative Finance Providers for Small Businesses: 

Alternative finance providers offer various benefits to small businesses, including: 

1. More flexible financing: Alternative finance providers offer businesses with more flexible financing options than traditional banks.  

2. Faster decision making: Alternative finance providers' funding decisions are often made faster than traditional banks, which is instrumental in the growth stages of small businesses. 

3. Less stringent requirements: Alternative finance providers can have less stringent requirements than traditional banks, making financing options accessible to businesses that wouldn't typically approve for traditional bank financing. 

4. Greater accessibility: A variety of alternative finance providers exist in the UK, and each offers unique financing options, enabling businesses to have greater access to financing options in today's economy.  

Comparison of UK Alternative Business Finance Providers: 

There are several alternative business finance providers in the UK, offering different types of financing options to small businesses. Some of the popular alternative finance providers in the UK are: 

1. Funding Circle: Funding Circle offers unsecured business loans and is the largest non-bank, globally integrated small business loans provider globally.  

2. Liberis: Liberis provides a revenue-based finance option to small businesses, which enables them to repay the loan based on their profits. 

3. iwoca: iwoca provides highly flexible short-term loans to small businesses. Their online application process is quick, and response times are fast. 

4. MarketInvoice: MarketInvoice offers invoice finance solutions, enabling businesses to borrow money against their outstanding invoices. 

Alternative finance providers play a vital role in meeting the funding requirements of small businesses in the UK. Using alternative financing offers businesses more flexibility, affordability, and accessibility than traditional bank loans. While comparing different alternative finance providers, businesses should consider their specific needs and goals to determine which provider would be the most advantageous for them. Ultimately, alternative financing solutions are excellent in helping small businesses succeed, grow, and achieve their objectives. 

Small-business owners must take their time and research the various alternative financing options that are available in the UK. With the help of the internet and government initiatives, it’s now easier than ever to access different funding sources. By assessing their unique needs and eligibility, small-business owners should be able to find the ideal, alternative financing options to fund their business goals.