Alternative Business Funding: Because It’s Not All About Credit Cards
If your company needs a cash boost, a credit card’s certainly an option. But it’s good to keep in mind there are many types of specialist business loans out there that could offer you a great alternative way to fund your business.
Used wisely, credit cards can offer businesses flexibility and enhanced security when making purchases. But there may be times when a specialist business loan, designed to meet a specific need, could prove a better alternative to fund your business.
Below we take you through several types of alternative funding to consider – some of which you can compare on NerdWallet.
What is alternative business funding?
Alternative business funding – also called alternative business finance or financing – refers to funding sources, such as specialist loans, that may be viable alternatives to a traditional bank loan or business credit card for a company.
How do I get a specialist business loan?
First compare what’s out there
Our business loans comparison section covers some of the credit types described in this article. It allows you to filter your search by type of loan – and then, using your turnover, available amounts and terms – to look at the various deals available.
Decide and apply
Applications can be made online or over the phone with the lender of your choice. Read more in our guide on how to prepare for a business loan application.
Hope for a ‘yes’
The decision can sometimes be made in minutes and the money could be in your nominated account within an hour or two.
This loan type is for embryonic companies. The criteria varies, and in contrast to other loan types, a company may not even need a minimum turnover to qualify. The Start Up Loans Company, a subsidiary of the British Business Bank, offers such loans. They’re specifically designed for businesses struggling to get finance from elsewhere – artists, fashion designers, IT founders and ‘mumpreneurs’ have all benefited from its lending.
» MORE: Compare startup loans
If you need to make a quick purchase, such as at an auction or during a sale period, then a bridging loan could fill a short-term financial gap until you can get hold of the funds you need or make a longer-term arrangement for doing so. Though the coronavirus pandemic affected appetites for bridging loans, the market is bouncing back, helped by the extension of the stamp duty holiday until 30 June 2021, and the furlough scheme until 30 September 2021.
» MORE: Compare Bridging Loans
A business tax loan helps you to pay the tax that you owe. The process is simple – specialist underwriters will examine your application and determine the risk factor, before (hopefully) lending you money on fixed borrowing terms.
» MORE: Compare Tax Loans
A merchant cash advance, also called a business cash advance, is a lump sum provided to companies based on projected figures, specifically card expenditure – so if you don’t accept credit and debit card payments, you won’t be eligible.
» MORE: Compare Cash Advances
Asset financing is a type of finance specifically designed for the acquisition and use of equipment such as vehicles, computers or machinery – a typical example of this is leasing. While a lease won’t give you ownership, it does let you use the latest technology for a predetermined period. A hire purchase will enable you to buy the equipment at the end of the term, and some also allow you to pay extra to include maintenance.
» MORE: Compare Asset Finance
Invoice financing is a loan presented as an advance on cash owed from customers, rather than waiting for them to pay. The invoices themselves act as collateral and lenders do not need to provide the full 100% of the invoice amount owed, so this method of financing is quite popular with banks. A good credit score is usually necessary, but once established there can be benefits – some lenders offer this as a free facility if you sign up to an ‘invoice financing contract’, i.e. letting the lender provide invoice financing for a set term.
» MORE: Compare Invoice Finance
Peer-to-peer finance (P2P)
A particular niche of start-up loans is the surge in peer-to-peer lending and borrowing (also known as crowdlending or crowd sourcing). A borrower can define the type of finance they need (loan, donation, etc) and set the terms, while in effect the lender is investing in a small company and may be able to gain interest at a rate better than banks will offer – although higher interest comes with more risk. The P2P industry became regulated by the Financial Conduct Authority in 2014, and as part of the regulation the FCA changed the level of reserves needed. From early 2017, P2P platforms need to have at least £50,000 of capital as a solution to resist financial uncertainty in the future and borrowers defaulting.
While technically fitting under the umbrella of those above, you may not be aware that internet giants such as Paypal and Amazon are lenders, too. Sellers in the UK have to be invited to apply, but it's possible to get a loan for hundreds of thousands of pounds if you are eligible.
Is alternative business funding worthwhile?
Ultimately, it’s up to you to decide if pursuing alternative business funding is worthwhile for your business – but there are plenty of benefits to be had. Applying for alternative finance can be a quicker, simpler process than the traditional credit-card-or-bank-loan route. The products on offer may be more versatile, with more flexible repayment options. And the sheer variety of products available means that if you’re a young business, or if your company’s credit history isn’t perfect, it’s more likely you’ll find a product that suits your needs on the alternative finance market.
Caroline Ramsey is a content creator who specialises in personal finance. More than a decade of working in editorial teams, she offers highly tailored content covering a number of topics. Read more
Hannah has been writing about money since 2013. Formerly a copywriter for Virgin Money, covering credit cards, mortgages, pensions, and more, she now writes on personal finance for NerdWallet UK. Read more