Business funding without a bank loan
While a bank loan might be the most obvious, there are several business funding options in UK.
As many startups will tell you, getting a bank loan to expand your business can be pretty tricky – especially if you don’t yet have much trading history. So, thousands of UK entrepreneurs look for alternative options of business funding to get their business going.
There are loads of business funding options in UK out there, from personal savings and family loans to grants and crowdfunding.
Here’s our top 10 business funding options UK:
Of course, not all of these will suit – or be available to – every type of small business.
Below, we take a look at each of them, explaining who they’re best suited to and what you should bear in mind if you’re considering them.
1. Savings/family loans
Let’s get the obvious one out of the way first. If you do have cash sitting in a bank account, then using that should be the first thing you do. You might also use a redundancy payout or even sell a property to get your dream off the ground.
The other straightforward option is to ask family members or close friends for financial assistance. This can definitely work but it’s really really important to make sure that both parties know exactly what they’re agreeing to. As this Xero Friends and Family loans guide points out, you really should write a contract of sorts – one that makes it clear whether the money is a loan or a gift, how it will be repaid, whether any interest will be charged etc.
Making sure the terms are clear, and there’s a proper agreement that can be referred back to later is the key to making sure a family loan doesn’t lead to any painful scenes down the line (or even you being written out of the will).
There’s more good advice in Virgin Startup’s piece on funding your startup with family and friends, which points out that it’s crucial to carefully consider how much your friend/family member can realistically afford to lend you – after all, you have to factor in the chance that they might never get their money back.
So, approach family loans the same way you’d approach any other investment. Be clear about how much money you need, what it would be used for, what your business plan is, and how you plan to repay the loan. That’s how you can go through the first option of business funding in UK.
2. Bank overdrafts
If you’ve ever had a bank account, then you probably know how an overdraft works. When your balance hits zero, you can keep spending (and go into minus figures), with interest charged on the minus amount.
A business bank overdraft works in the same way – it’s linked to your business bank account and the amount of interest you pay will depend on how your business is doing financially.
Overdrafts can either be arranged (you agree with your bank a set amount you can go overdrawn, and how much you will be charged to do so) or unarranged (you go overdrawn without sorting it with your bank and, generally speaking, get charged a small fortune for doing so).
They can also be either secured or unsecured.
A secured overdraft is, as you’d expect, secured against something your business owns. This could be your business premises or a business vehicle for example – and this could be repossessed if you can’t afford to pay back the overdraft. An unsecured overdraft has no such conditions.
To give an idea of how this works in the real world, let’s take a look at Santander’s business overdraft.
Only available to Santander business banking customers (business overdrafts are always linked to and provided by whoever you have your business bank account with), the key points are:
- You can get an overdraft amount of between £500 and £25,000
- A variable annual interest rate of 10%
- An annual fee that is 1% of the agreed overdraft (with a £50 minimum)
So, if you used £10,000 of a £15,000 overdraft, you’d pay approximately £1,150 a year on top of the amount borrowed
They’re perfect for riding out lean periods or coping with unexpected bumps in the road, but shouldn’t be used as a long-term financial solution for your business funding needs.
You should also know that the overdraft amount is repayable on demand (in other words, when the bank says so), so try to have some sort of back-up plan in place and don’t borrow a huge amount.
Of course, to get a business bank overdraft, you’ll need a business bank account.
If you need a hand working out which one is the right choice for your business, then just use our quick and easy comparison tool to take a look at the leading options and see what each has to offer.
Get no-obligation quotes and find the right fit for your business
3. Business grants
Business grants are basically free money – what’s not to love?
As you’d imagine, there is a pretty big catch.
There are hundreds of grants out there, but they all have different conditions that need to be met.
Some are only offered to businesses in a particular area, some can only be accessed by businesses in particular sectors, and some require your business to be doing truly groundbreaking stuff in terms of research and development.
How you get the money varies – some grants give you a lump sum when you’re accepted, some pay in instalments, some need you to pay and then claim money back, and some require matched funding.
What matched funding means is that if you’re applying for a grant of, for example, £10,000, then you’ll need to match that with £10,000 of funding from other sources.
A good place to start looking is the government’s business finance support page, which has a big list of various business support schemes that operate in particular regions or support specific sectors/types of businesses.
Not all of these will offer grants, with some of the other support on offer including mentorship, advice, and access to discounted office space.
The attractions of business grants are clear – but, you need to go into the process with your eyes open.
There’s a lot of work involved in finding a grant you can apply for and then going through the application process. So, make sure you set a good amount of time aside if you want to pursue this route to avail such business funding options in UK.
4. Invoice finance
in a nutshell, here’s how it works:
As you can see, invoice finance unlocks the value of your unpaid invoices, boosting your cash flow and stopping unreliable clients from getting in the way of your expansion plans.
And, as you’d expect, you’ll pay something for this service.
How much depends on which invoice finance company you go with and how your business is doing – generally speaking, the higher the value of the invoices you submit, the lower the rate you’ll pay.
Because of the way this model works, your finance company has a real interest in helping your business succeed. After all, the more money you make, the more money they can make from you, so many providers give a very hands-on service that can include assigning you a personal account manager, visiting your business in person, and offering expert advice.
Using an invoice finance company can also free you from having to chase down unpaid invoices yourself.
5. Community schemes (CDFIs)
If you’ve never heard of a CDFI, that’s not too surprising as they’re a pretty hidden part of the UK’s financial landscape.
CDFI stands for community development finance institutions and, in short, they are responsible lenders that both provide finance and support to the businesses they lend to.
This includes lending at reasonable rates and means that CDFIs aren’t exactly money spinning – in fact many operate on a not-for-profit basis and as a Guardian article on CDFIs put it, “rely on government grants, private investors and philanthropists”.
Because of this, the decade of local government funding cuts has taken its toll. There were once over 80 CDFIs but there are far fewer now, and some only lend to companies in specific regions or that operate in particular sectors.
To see what CDFI options are available to your business, use the search option on the Finding Finance website. You just need to enter the type of loan you’re looking for, the amount you need to borrow, and your postcode.
If you need a business loan but can’t get accepted by a mainstream bank, then borrowing from a CDFI could be a great fit for your business.
Crowdfunding has been going for a while (the basic concept dates to at least the 1700s) but its popularity has risen steadily over the past two decades – and it’s now a really important route for small businesses seeking funding.
The essential idea of crowdfunding is pretty simple. Lots of people (the crowd) contribute small amounts of money, which can then add up to pretty large amounts of funding.
There are four types of crowdfunding – with the main difference being what you give your investors in return for their cash:
- Equity crowdfunding – This area is led by Crowdcube and Seedrs, and is based on the idea that you give away a stake in your company in exchange for funding. This means you can raise large amounts, but you’ll need to disclose lots of information about your business and need to be careful about how much of your company you give away.
- Rewards-based crowdfunding – If you use a rewards-based crowdfunding site like Kickstarter or Indiegogo, then you reward your backers with gifts. This often means giving them the product you’re selling at a discount but it can be less tangible things like a computer game using the names of its investors for character names. The major drawback of rewards-based crowdfunding is that many sites have an ‘all or nothing’ approach – if you don’t reach the amount you’re asking for, then you get no investment at all. You can though raise more than you initially ask for, so make sure your target is modest and achievable.
- Peer-to-peer crowdfunding – With peer-to-peer crowdfunding, you’re essentially getting a business loan from a pool of investors, with the expectation that you’ll pay it back with interest. We take a closer look at this model in the dedicated section on peer-to-peer lending.
- Donation crowdfunding – As the name suggests, with donation crowdfunding, you get funding without having to give anything in return. However, as you might imagine, this only works for businesses that are supporting their local areas.
If you’ve got an idea that you think will appeal to a specific customer base, then crowdfunding can be a great way to both raise cash and get a good sense of the public appetite for your business.
7. Business cash advance
Business cash advance – also called merchant cash advance – only launched in the UK a few years ago but is becoming an increasingly popular source of funding for SMEs.
It’s essentially a business loan that you pay back through a percentage of your card sales.
As part of the application process, you and the lender will agree on the amount you want to borrow, and you’ll know the fixed fee that will be charged.
For example, leading business cash advance lender Iwoca says that it typically offers rates of between 6% and 12%.
So, if the fee is 12%, a £50,000 cash advance would cost you £6,000 as a lending fee (12% of £50,000), meaning you’ll pay back £56,000 in total.
As long as you meet a minimum repayment level (in Iwoca’s case, 12.5% of the full loan amount every three months), then your monthly repayments are variable – you’ll pay back a bit more in more profitable months and a bit less in less profitable months.
And the amount you can borrow is based on your turnover, reducing the chance you’ll borrow an amount that you’ll struggle to repay.
Most business cash advance lenders will require you to have a minimum trading history (three months for Iwoca) and have a minimum monthly turnover.
If you’re eligible though, business cash advance could be a clear, flexible way to fund the expansion of your business.
8. Asset finance
Asset finance is a pretty broad category that covers lots of different types of lending but it can basically be broken down into two categories:
- Finance that helps you buy or lease assets like vehicles and industrial equipment
- Finance that unlocks the value of things owned by your business
The first category includes things like hire purchase (where your repayments eventually lead to you owning the asset) and equipment leasing (where the lender buys the asset and you simply pay to rent it off them).
The second category primarily refers to asset refinance.
Your finance is then secured on the asset, and it will be repossessed if you don’t keep up repayments.
For more information on the different types of finance available in this category, check out the Funding Options asset finance guide.
However, for financially savvy SMEs, asset finance can be a great option – either allowing you to spread the cost of important business equipment or using assets to give your business a cash boost.
9. Peer-to-peer (P2P) lending
P2P lending is basically a specialised form of crowdfunding, where lots of people pool their resources and give loans to people and businesses that need them.
P2P lending sites like Funding Circle manage the whole process, collecting money from investors and assessing businesses that apply for loans to see who they should lend to and what rates they should offer.
From a business perspective, the process is very similar to applying for a standard business loan – with the big difference being that you can be accepted (and get funding) much more quickly and that the money you receive ultimately comes from ordinary people rather than a bank.
Rates can also be higher than a conventional business loan – Funding Circle says that businesses can borrow between £10,000 and £500,000 at annual rates of 2.9%-12.1%.
The interest you pay then gets pooled and eventually returned to the individual investors that funded the loan in the first place.
Depending on your trading history, some P2P lending sites may also require you to put up security on your loan – in other words assets like equipment or property that can be repossessed if you fail to keep up repayments.
P2P lending is a very attractive option for small businesses – you can see if you’re likely to be accepted in as little as 30 seconds, the application is quick and straightforward, and you could even have the money in your account within a few hours.
However, there are the same sorts of conditions as a normal business loan. Your credit history could be negatively impacted if you fail to keep up repayments, you will often have to stump up an additional fee to repay your loan early, and you’ll need at least some trading history to be accepted.
You should also check that the P2P lender you’re applying to has a decent track record – this is a rapidly growing sector and you want to make sure that you’re working with a reputable and established company.
Bootstrapping is pretty simple – you grow your business without any outside investment, funding it with savings, personal finance, and the profits from your business.
Many, perhaps even most, businesses start this way but some manage to retain this ethos as they steadily grow to become leaders in their sectors.
The most famous bootstrapped business is probably Apple, but other businesses to have trodden this determinedly independent road include GoPro and Spanx.
The attractions are obvious – you retain complete control over your company and live the dream of the rebel entrepreneur, forging your own path and staying true to your ideals.
However, it doesn’t take too much thought to realise the downsides.
Bootstrapping your business is really really hard work. You’ll have to make sure your business model produces consistent cash flow, and budget extremely carefully.
And you’ll be swimming against the tide. Most startups and small businesses fail because, fundamentally, they run out of cash. Needless to say, not using outside investment makes this far more likely.
To successfully bootstrap your business, you’ll need to be creative, resourceful, financially savvy and passionate but – if you can make it work – then the rewards could be huge.
As you can see, there are loads of different ways to fund your business apart from just using a bank loan.
Different methods are suited to different types of businesses, whether that’s firms that operate in particular sectors or regions, or established companies vs startups.
Here’s the full list, with key info for each funding option:
- Savings/family loans – If you’ve got the cash or willing family members, then this is clearly the easiest way to get funding, but make sure the terms are clear to avoid unrest down the line.
- Bank overdrafts – This is a quick and convenient way to give your business a cash flow boost, but high interest rates means it should be avoided as a long-term solution.
- Business grants – Business grants are basically free money for your business, with the pretty significant catch that it can be hard to find one that you’re eligible for, and applying can be time-consuming and complex.
- Invoice finance – Invoice finance lets you unlock the value of your unpaid invoices, and offers a hands-on service that can grow with your business. Fees are dependent on the value of submitted invoices, so this is a great fit for larger SMEs.
- Community schemes (CFDIs) – CDFIs are responsible lenders that could offer your business finance at lower rates than banks, but it can be hard to find one that operates in your area.
- Crowdfunding – Lots of companies are being funded through crowdfunding these days, with large numbers of backers each contributing small amounts. It’s not suitable for every business, but could be an ideal solution for business ideas that appeal to specific customer bases.
- Business cash advance – A business cash advance is basically a business loan that you pay back through a percentage of your card sales. You get clear terms, a rapid application process, quick funding and flexible repayments. Most lenders though have minimum trading history and minimum monthly turnover requirements.
- Asset finance – Asset finance is one of the more complicated areas of business finance, but can be an effective way to spread the cost of vital equipment or unlock the value tied up in vehicles or industrial machinery.
- Peer-to-peer (P2P) lending – P2P lending is a specialised form of crowdfunding, where small business loans are funded by a large number of individual investors. It’s a speedy way to get funding but carries the same risks as a normal business loan, and failure to repay could affect your credit rating.
- Organic growth/bootstrapping – Bootstrapping means funding your business without outside investment. It’s hugely challenging, but lets you stay true to your business ideals and can bring huge rewards.
There’s no universal best fit when it comes to funding your business – the right choice for you will depend on what stage your business is at and what you want to do with the finance you receive.
The good news is there’s loads of great info out there, both on Startups and other reputable websites like the British Business Bank.
And it’s really worth putting the effort in; find the right finance solution and your business can scale up rapidly and get to a much better place much more quickly.
Good luck & remember, if you need help in preparing a grant application, you NEED Capti. Contact us today!