Raising Finance

10 alternatives to a bank loan for growing businesses

10 min read

27 August 2014

The economy is returning to growth but there are concerns that growing businesses cannot access the finance they need to maintain pace.

While banks remain the main source of funding for Britain’s businesses, for many this is far from the best solution as they will not be successful or because they won’t get the funding on terms which are favourable to them. 

Here are ten alternatives to a simple business loan which could help you grow your company.

Debt finance

The type of funding you pursue will obviously depend heavily on the the status of your business, its eligibility, how much you can afford to take on, and whether you’re willing to give away equity. 

If you want to retain sole ownership then debt funding is likely to make the most sense. 

1. ABL

Asset-based lending (ABL) allows you to borrow against the value of your assets, whether that’s your premises, stock, machinery or unpaid invoices. 

ABL has struggled a little due to perceptions that it is a last resort for struggling companies who need to turn assets into working capital or risk going bust. But attitudes are changing and for many businesses the opportunity to turn invoices into working capital is a useful way to boost growth. 

ABL is available from some banks, and other traditional providers include Close Brothers, GE Capital and Investec. 

2. Invoice trading 

Not entirely distinct from ABL, invoice trading is a new form of invoice finance which connects you directly with investors through an online portal. Providers say this option is more flexible and transparent than traditional invoice finance, which can often tie you into long commitments. 

The two leading players in the UK market are MarketInvoice and Platform Black. 

3. P2P loans

Sometimes referred to as “debt crowdfunding”, P2P lending allows savers to lend directly to businesses in return for interest. All you have to do is create a pitch and provide some key pieces of business data and then your platform assigns you a risk band before passing the pitch on to investors.

The benefits of this form of funding tend to be speed and convenience compared to applying for a bank loan, not to mention a higher likelihood of approval.

Funding Circle is by far the market leader in P2P business lending in the UK, although other companies like Zopa, which has focused more on consumers up to this point, are following in its footsteps.

4. Unsecured digital lenders

In recent years a number of business-orientated unsecured lenders have popped up, which allow you to borrow flexibly at very short notice. Companies like Ezbob and Everline use complex algorithms to deliver a lending decision which is much quicker and, they say, more accurate than can be calculated by banks. Money can typically be in your account on the same day.

This convenience comes at a cost though, with high interest rates compared to banks. The maximum you can borrow will typically be around £50,000 so it’s mainly useful for relatively small companies or specific short-term projects.

5. Bonds

Bonds have been identified as a key growth area for business finance. 

These effectively act as an IOU offering investors, who tend to be individuals rather than institutions, a fixed return on the value of the bond, followed by repayment of the full amount some years later. They are typically used by fast-growing businesses who are confident of future performance.

Retail bonds are those listed on the London Stock Exchange’s Order Book for Retail Bonds, and can be freely traded by investors. The amounts raised through this method tend to be particularly large – from £25m to £300m so they are suitable for successful, well-established businesses with a high growth trajectory.

Some businesses go down the route of issuing their own mini-bonds, which are non-transferable (so investors are tied in for the whole period). Hotel Chocolat, John Lewis and King of Shaves have all raised money through this method. Crowdcube, an equity crowdfunding platform, has also launched a service allowing growing businesses to raise money through mini-bonds.

Equity finance

Equity finance is suitable for those entrepreneurs willing to give up a stake in their business to investors. While this might seem unattractive to those wanting to retain a firm grip on their business, investors can also act as mentors who help you take your business in the right direction. 

6. Venture capital

Venture capital (VC) funds invest in early-stage businesses with high growth potential. Though they are generally willing to take on greater risks than other investors, they will need to see strong potential for growth in your business, and that you are a capable leader.

VC funding tends to be invested over a number of years and investors will expect you to do all you can to develop a solid return for them, so you will need to be ready to really push for growth.

There are dozens of VC funds in the UK, which has the largest VC market in Europe, but notable ones include Index Ventures and Balderton Capital.

Related: How to pitch your business to VC investors. 

7. Private equity

In contrast to VC funds, private equity funds tend to go after larger companies with a well-established historical track record. These take money from institutional investors and buy equity in under-performing private companies which have strong potential to be turned around.

The investment is usually over a long-term cycle and as with VC funds investors will be seeking a strong return so will generally work very closely with management teams to achieve growth. For some entrepreneurs private equity investors can be too much of an intrusion, but others value the discipline and professionalism they can bring to a growing business.

8. Equity crowdfunding

Equity crowdfunding harnesses the money of dozens if not hundreds or thousands of supporters who buy small amounts of equity in your business. 

As well as raising the money you need, this has the added bonus of bringing on your loyal customers as an extra set of voices in your organisation.

Many companies choose to use crowdfunding platforms such as Crowdcube or Seedrs. Others have done it independently, with craft beer company Brewdog‘s “Equity for Punks” scheme perhaps being the most high-profile example.

Others

9. Pension-led funding

If you’ve got a decent amount of cash sitting in you pension pot then it could be possible to turn this into business funding.

Clifton Asset Management is a leading provider of this form of finance. It allows customers to invest their own pension fund in their business, either by lending money against the value of its IP or buying your company’s assets and leasing them back at a commercial rate.

More on how this works here.

10. Autofinancing

It’s worth having a really good think about whether you really need funding at all. Even if you think you will need growth finance in the future, if it’s possible to keep costs low and margins high then you might be better off waiting.

Not taking on debt has the obvious advantage of minimising costs later down the line, and not giving up equity means you can have a greater control over your business.

If you can prove the success of your model without needing to take on external funding then you could be in a better position later down the line; both because it demonstrates your prowess to investors and also means the stake that you hold will be worth more as a proportion of the company’s total value.

Autofinancing can be a difficult concept to get your head around and it certainly won’t work for all companies but it can work. For instance German consumer appliance giant Miele, which now turns over £2.5bn each year, has been self-funded throughout almost all of its 100-year history.

Related: Five ways to compare funding for your business