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Alternatives to bank loans: which is right for your business?

Business Finance

Alternatives to bank loans: which is right for your business?

Updated: 19 October 2021

Though banks used to be the go-to provider for getting a business loan, nowadays taking out a bank loan isn’t your only option for a cash injection. Online providers have continued to expand over the past decade, with an annual growth rate of nearly 25% leading to a wealth of alternative funding options available to explore. Here, we take a look at the types of alternative finance available and the features they offer. 

What alternatives to bank loans are available? 

Thousands of UK business owners use alternative finance to boost working capital, cover day-to-day running costs, and invest in their business’s future. There are many different products available, and choosing the right one will depend on your needs, sector and how you operate.

Alternative business loans  

Term loans are a popular finance choice among business owners, as they allow you to keep control of your business and assets. Business loans can be used for almost any purpose, for instance: 

  1. Working capital 
  2. Paying for a website 
  3. Funding a marketing campaign 
  4. Paying staff 
  5. Buying equipment or stock 

Unsecured loans 

Unsecured loans are loans which don’t need to be secured against an asset. Taking out an unsecured loan can be a good choice if you don’t have assets to use as security, or if you may want to sell your valuable assets in the future. They can also save you time as you don’t need to get your assets valued when you apply for the loan.  

At Funding Circle, you can borrow between £10,000 and £500,000 without using business assets as security, but a personal guarantee may be required.  

Peer-to-peer loans 

Peer-to-peer loans are managed via platforms that connect investors with creditworthy businesses. Rather than offering finance in exchange for equity, the investor gets a return on their investment in the form of interest.  


Microloans are generally smaller than short-term loans and spread over a shorter period. The advantage to microloans is that they allow you to borrow a small amount of money to ease cash flow or purchase stock, without the need to commit to a larger loan or an ongoing line of credit. Though comparatively, microloans tend to have far higher interest rates. 

Early stage & development loans 

Some business loans are specifically designed for startups and early-stage enterprises. These loans are available from banks, online lenders and the government. The UK Government’s Start Up Loan Scheme offers new businesses the chance to borrow up to £25,000 (£7,200 is the average loan amount) over 1 to 5 years, with a fixed interest rate of 6%. If accepted, you’ll also benefit from 12 months of free mentoring and support. You can find more information about this here.

Pension-led loans 

Pension-led loans allow you to borrow money from your personal pension (or the pension of any company director) and pay it back with interest. This is typically only a suitable option for pensions valued at over £50,000. The maximum loan amount is capped at 25% of the pension value. Pension-led loans are an attractive alternative to bank loans, as they allow you to develop your pension and your business simultaneously. 

Commercial mortgages  

A commercial mortgage may be a good alternative to a bank loan, if you’re hoping to buy land or premises for business use. Business mortgages differ from residential mortgages in that the value of commercial property is usually far greater. Like ordinary mortgages, commercial mortgages are secured against the land or premises you purchase. This means the property may be repossessed if you fail to meet repayments. The average commercial mortgage term is 25 years, though some are much shorter. The downside to commercial mortgages is that you may need to put down a deposit of up to 30% of the property’s value. 

Mini bonds 

Mini bonds are a form of debt finance. Businesses wishing to raise finance can offer investors mini bonds in place of shares. When the bond matures, the investor recoups their money. In the meantime, they receive regular monthly or annual interest on the amount they invested. 

Asset financing 

Asset financing is taking out a loan up to the value of a business asset (an existing asset or one you intend to buy. In the latter situation, the loan is used to purchase the asset). The loan is secured against the asset and paid back with interest. This means it may be seized if you fail to meet repayments. Asset financing works well for businesses that use vehicles, valuable equipment, or other assets to borrow against. 

Short-term business finance 

Businesses that only need to raise a small amount of money (e.g. for a small stock purchase, to cover a minor unexpected expense, or to improve short-term cashflow) might consider a different method of alternative finance. These options are considered short-term business finance, and there’s a few options that are available to businesses. 

Invoice financing 

Invoice financing is when you borrow a percentage of an unpaid invoice, then pay it back with a charge once the balance has been cleared. It can be suitable for business owners who regularly experience a delay between completion of work and receipt of payment. 

Merchant cash advance 

Merchant cash advances work much like invoice financing, except you borrow a percentage of your average monthly card sales. The amount you borrow is paid back the following month, plus a fee. This option may be more suitable for businesses who accept a high value of card transactions.

Business credit cards 

Company credit cards work just like personal credit cards, except they are designed to be used for business expenses. Business credit cards typically have higher limits than personal credit cards, as they are based on your company’s income. Compared to business loans, credit cards often have high interest rates.

Equity finance 

If you’re looking for an alternative to a bank loan for your business, borrowing money may not be your only option. Many business owners can raise funds by selling equity instead. Though this sometimes means giving up partial control of your business, or signing away a share of your profits indefinitely, equity financing has a major plus-point: you won’t need to repay the money. 

Angel investors 

An Angel investor is an individual, usually with high-net worth, who provides financial backing to startups and small businesses in exchange for equity. This might be a one-time investment, or several cash injections spread out over time. Many Angel investors can provide valuable advice and will want a say in key business decisions. Usually, the Angel investor makes money by selling their shares in the company at a profit.

Venture capital 

Venture capitalists invest money in businesses in exchange for equity. Unlike Angel investors, venture capitalists usually invest money pooled from multiple investors. Typically they are looking to invest in businesses with significant growth potential.  

Small business grants 

A business grant is a privately or publicly funded sum of money awarded to a business that doesn’t need to be repaid. Grants usually come with strict eligibility criteria and can be difficult to obtain. There may also be restrictions on how the money can be spent. 

Government grants 

Government grants are, as the name suggests, funded by the UK Government and administered directly, or via associated bodies. There are currently more than 70 government grant schemes in operation around the country. Many grants are only available to minority business owners, people in certain regions, or to businesses within industries the government is keen to subsidise.


Crowdfunding is a method of alternative funding where businesses can raise finance for new projects, businesses or ideas. Your funds are raised by lot’s of individuals (the crowd) each putting in a small amount  via an online platform. This is often used by startups or growing businesses. 

Equity crowdfunding 

Equity crowdfunding refers to multiple people (often hundreds, or thousands) investing money in a business, in exchange for shares. If the business does well, the investors stand to make a profit by selling their shares. This type of equity finance requires minimal involvement from the investors, which is advantageous if you would prefer not to hand over too much control.  

Donation or rewards-based crowdfunding 

Many small businesses raise finance with donation-based crowdfunding. This type of crowdfunding usually only works when your business is based on something your funders personally believe in. This could be a product or service they feel should be available, or something that benefits people, or the environment. 

Rewards-based crowdfunding is another popular alternative finance option. This involves pledging your funders a product or service at a reduced price, if a certain amount of money is raised. Kickstarter campaigns are an example of rewards-based crowdfunding. 

How to choose alternative business finance 

Your main priority when choosing business finance should be making sure the finance is fit for purpose – it’s not just about getting the largest sum possible. Ask yourself the following questions when weighing up your options: 

  1. Can I use the money for what I need? 
  2. Will I get the money soon enough? 
  3. Do I want to keep all my equity? 
  4. Do I want to keep full control of business decisions? 
  5. If I get a loan, can I afford the repayments? 
  6. How likely am I to be accepted? 

How to apply for alternative business finance with Funding Circle 

To be eligible to apply for a Funding Circle loan, your business must: 

  1. Have at least two years’ trading history 
  2. Be a limited company or a limited liability partnership (LLP)  

If eligible, you could borrow £10,000 to £500,000 over 2 to 6 years . Unlike many traditional bank loans, you will not be asked to submit financial forecasts or business plans. You can check if you’re eligible for a Funding Circle business loan online in just 30 seconds.

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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