Sage Advice UK

Five alternatives to a bank loan

If you’ve applied for a bank loan and it hasn’t worked out, you might be surprised to discover the huge range of non-bank options that could work for your business. Here are just 5 alternatives to a bank loan:

Peer-to-peer lending

Peer-to-peer (P2P) lending is probably the best-known form of non-bank finance, and represents a viable alternative for many firms. Online platforms match your business with private investors who collectively lend the money, potentially getting a better return than a savings account while bringing the cost down for you too.

The public format often suits eye-catching businesses, but the main advantage over bank lending is that peer-to-peer can get you up to hundreds of thousands of pounds in unsecured finance, lending as much as five times what the banks would offer without security.

Merchant cash advances

One of the strengths of the alternative finance market is developing solutions for under-served sectors. Merchant cash advances are a great example of this.

Most of the sectors that use card terminals are difficult for the banks to lend to, such as shops, bars, restaurants and hotels. They often rent their premises, hire their equipment, and suffer from seasonal fluctuations in revenue too – all of which make a standard bank loan a tall order.

Merchant cash advances solve this problem by using card terminals as a kind of ‘security’ (although they’re technically unsecured). The loan amount is based on recent card sales and repaid as a percentage of future takings – and because the lender works with the payment provider directly, the repayments feel painless because they’re taken at source.

Pension-led funding

Pension led funding is another great example of the ingenuity of alternative finance. While not everyone has a pension pot, business owners that do can use it to lend to their own company, which repays the pension with interest.

If everything goes well, the business benefits and the pension pot is bigger than it would have been – and many directors take this route because they’d rather use their pension than home equity (via a personal guarantee) to get a business loan.

Invoice finance

There’s nothing wrong with using a business loan for multiple purposes – but if you plan to use the funding for a specific project, it makes sense to explore the finance products that specifically cater to your situation.

Invoice finance can help for anything project-related, effectively speeding up your payment terms but leaving your customers unaffected. The basic idea is a cash advance based on a percentage of the invoice value, normally issued when you raise the invoice.

For wholesalers and exporters, trade finance can help you fund the long payment terms and cash flow problems associated with international buyers and suppliers; and it’s often combined with invoice finance for a complete solution that covers project costs and daily cash flow. Another great benefit is that the amount of finance available grows with your business.

Revolving credit facilities

As well as business loans, it has also become more difficult to get overdraft-style facilities from the major banks. Luckily, new providers are offering alternatives in this area too, with some offering daily interest calculations and others giving decisions within hours of applying.

Lots of companies find that having this type of arrangement is simpler – you get it set up with an agreed credit limit, then dip into it when you need to. An added bonus is that with many providers you’ll only pay for what you use.

Conclusion

These are just five alternatives to a bank loan – but there are many more. The bottom line is that with this much choice, being unsuccessful with the bank doesn’t necessarily have to halt your plans.