What is alternative finance? Options for UK businesses
Published on: 29th July 2026
Alternative finance is funding that comes from outside the traditional banking system. Sounds niche but it's actually become mainstream. Since 2008, when banks stopped lending freely, alternative finance has grown dramatically. Today, you've got far more options than you might realise.
If your bank has said no, or if you just want faster access to capital, traditional lending routes often aren't the answer. This guide looks at what's actually available, how each type works, and what might suit your business.
What is alternative finance?
Banks tightened their belts after 2008. That's when early alternative lenders stepped in, particularly crowdfunding and peer-to-peer platforms. What started as a workaround has become a thriving industry. You can now fund equipment, bridge cash flow gaps, launch products, or scale your business through channels outside traditional banking.
What makes alternative finance appealing is speed and accessibility. Most decisions come back in days, not weeks or months. You won't need stacks of documentation. Plus, alternative lenders often look at different things – your cash flow, your trading record, how long you've been in business. These matter as much as your credit score.
Types of alternative finance
Peer-to-peer and direct lending
With peer-to-peer (P2P) direct lending, you're borrowing from lots of individual investors rather than one bank. You get the money, pay it back with interest, much like a traditional loan. The difference is what happens behind the scenes.
What makes this work is the investor base. It's not just individuals. You'll have pension funds, local government bodies, and financial institutions lending alongside thousands of individual investors. That mix matters because it keeps capital flowing. These platforms have weathered economic downturns precisely because they aren't relying on one funding source.
Invoice finance
You've invoiced a customer on 30, 60, or 90-day terms. Your invoice is real money – you've done the work – but the cash isn't in your account yet. Invoice finance solves this by letting you sell that invoice to a finance provider and get paid immediately. Once your customer settles the bill, you repay the finance provider.
When would you actually use this? Say you land a big contract but don't have the capital to fulfil it immediately. Or you're dealing with customers who consistently pay late, and it's squeezing your working capital. Both common scenarios. Understanding invoice factoring vs invoice discounting helps because they work differently: with factoring, the finance company chases your customer for payment. With discounting, you still do the chasing yourself.
Asset finance
Need new equipment or vehicles? Buying outright means tying up a chunk of capital. Asset finance lets you spread those costs instead. You pay monthly installments while still getting the kit you need. Your working capital stays relatively healthy, which matters when you're growing.
This works particularly well if you're scaling operations and need gear but don't want to empty your bank account. You can fund machinery, vehicles, IT equipment – basically anything your business relies on. The beauty of it is that you get access to what you need now while spreading the cost. It is important to bear in mind that the asset you are purchasing acts as a security against the finance agreement.
Crowdfunding
Instead of pitching to one investor or bank, you pitch to many. Money comes in small amounts from lots of people, typically through online platforms like Kickstarter.
There are two flavours. Equity crowdfunding means you're giving investors a stake in your business. You get capital without monthly repayment obligations, which suits startups and high-growth businesses. The trade-off is straightforward: you're sharing ownership. Not everyone's comfortable with that.
Then there's rewards-based crowdfunding. Investors back your project because they believe in it or want the reward (first access to your product, a discount, merchandise, whatever). It's brilliant for product launches or creative projects, and it doubles as market validation. If people will fund you on Kickstarter, there's probably actual customer demand.
Merchant cash advance
With an MCA, you're getting paid for your future sales in advance. You sell a portion of your credit card and debit card income to a lender. So if you process £10,000 monthly in card transactions, they might give you £25,000 upfront. Then you repay through a fixed percentage of those card takings.
Why might you do this? It's cash in hand today, and your repayment automatically adjusts based on your sales. Busy month? You repay more. Slow month? Less goes back to the lender. That flexibility appeals to businesses with variable income.
The catch is cost. MCAs are pricier than other finance options. But if you've got strong card sales and genuinely need cash now, and other routes aren't available, it can work.
Revenue-based financing
This is one you might not have heard of, but it's gaining traction. You get a lump sum upfront. In return, you pay the lender a fixed percentage of your monthly revenue until you've hit an agreed cap. After that, you're done. They get their money back and you keep everything else.
It works well for growing businesses that want capital without taking on debt. Your repayment naturally scales with your revenue, which means it doesn't crush you in slow months. And there's no personal guarantee required, which is refreshing compared to loans.
How to choose the right alternative finance option
Start by asking yourself what you actually need the money for. Equipment? Asset finance can be your straightforward answer. Working capital gaps? Invoice finance and P2P loans both handle that well. Launching a new product and want validation alongside funding? Crowdfunding might be worth exploring.
If you prefer working with an established traditional lender, Funding Circle's small business loans offer fixed rates and terms up to 6 years for borrowing £10,000-£750,000.
Speed matters, too. If you need cash in days, P2P lenders and MCAs are fastest. Crowdfunding takes weeks or months, but it costs less overall. Invoice finance and asset finance typically sort themselves out within a week.
Then think about your cash flow and what you can realistically repay. Loans demand fixed monthly payments. MCAs and revenue-based financing flex based on your business performance. Which one fits your situation better?
Finally, consider ownership. Are you willing to share your business with investors? Equity crowdfunding means giving up a stake. If you want to keep control completely, stick with debt-based options like loans, invoice finance, or asset finance.
FAQs
What is the difference between alternative finance and a bank loan?
Traditional bank loans can involve more detailed applications, stacks of documentation, and usually weeks of waiting. Alternative finance is anything non-bank: peer-to-peer loans, crowdfunding, invoice finance, and so on. The main differences are speed and how lenders assess you. Banks look at one thing. Alternative lenders often consider multiple factors – your cash flow, how long you've traded, your business model.
Is alternative finance regulated in the UK?
It is, yes. The FCA oversees peer-to-peer platforms, crowdfunding sites, and asset finance providers. That regulation protects you and maintains standards across the sector. Always verify that any lender you're considering is FCA-regulated before committing.
Which alternative finance option is best for small businesses?
Honestly? It depends entirely on your situation. If you've been trading a few years and need working capital fast, P2P loans are solid. If you're sitting on unpaid invoices, invoice finance solves that immediately. Investing in equipment? Asset finance spreads the cost without hurting your cash. Startups and fast-growing businesses often find crowdfunding or revenue-based financing more appealing because the repayment terms don't strangle you. Consider what you need, how urgently, and what your cash flow can handle.
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Disclaimer
29/07/2026 – While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.
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