Best alternative to bank loans for your business

Securing finance is essential for businesses looking to take steps towards their growth. While traditional bank loans have long been the go-to option, with the loss of local bank managers and tight restrictions, they're not always easily accessible, or the best fit for every business's needs. 

Fortunately, there are alternative financing options available that can provide flexibility, convenience, and tailored solutions and these are fast gaining popularity. According to the British Business bank, 53% of lending in 2022 was done by alternative and challenger lenders. 

If you’re struggling to get a bank loan, there are lots of alternative business loans you could use.

Why it can be difficult to get a bank loan for small businesses

For small businesses, getting a bank loan can be challenging for a number of reasons: 

• Small businesses typically lack an extensive financial history or substantial assets that can be used as collateral, making them riskier in the eyes of lenders. Banks prefer to lend to businesses with a proven track record of profitability and a stable cash flow to ensure timely repayment. 

• Traditional banks have strict eligibility criteria that act as large hurdles for small business owners. They will require a business to have a good credit score and high turnover, that small businesses could struggle to meet. 

• Economic uncertainties and market volatility can further deter lenders from extending credit to small businesses, as they may be perceived as more vulnerable to financial downturns.  

What are the alternatives to bank loans?

Invoice finance

Invoice finance, is a financing solution that enables businesses to access funds tied up in their unpaid invoices. This option is particularly suitable for businesses that have outstanding invoices with lengthy payment terms. With invoice finance, a third-party lender advances a percentage of the invoice's value (typically around 80-90%) upfront and collects the payment directly from the customers. Once the customers pay the full invoice amount, the lender releases the remaining balance, minus a small fee.

Benefits of invoice finance:

• Provides immediate access to cash flow, reducing the impact of late payments.

• Offers a flexible funding solution that grows alongside the business's sales.

• Simplifies cashflow management by outsourcing credit control and collections.

Revolving credit facility 

Revolving credit facilities offer businesses a flexible line of credit that can be used as and when needed. Unlike traditional bank loans with fixed repayment terms, revolving credit facilities work similarly to a credit card, allowing businesses to borrow and repay funds repeatedly within a set credit limit. Interest is only charged on the amount borrowed, providing cost-effective financing.

Benefits of a revolving credit facility:

• Offers flexibility and convenience, with the ability to access funds quickly.

• Interest is typically charged only on the borrowed amount, saving costs.

• Enables businesses to manage cash flow fluctuations and unexpected expenses. 

Business credit cards

Business credit cards provide an accessible and convenient way to cover short-term expenses, manage operational costs, or bridge cash flow gaps. They’re ideal for smaller, recurring purchases or emergency expenses, and many offer rewards, cashback, or interest-free periods if repaid promptly.

Benefits of business credit cards:

• Quick and easy access to funds for everyday business needs.

• Helps build your business credit score when used responsibly.

• Some cards offer interest-free periods, cashback, or travel rewards.

  Merchant cash advance

Merchant cash advances are a popular type of business loan for businesses with consistent credit or debit card sales. With a merchant cash advance, a lender provides a lump sum upfront in exchange for a percentage of the business's future card sales. Repayment occurs automatically through a predetermined percentage of each future card transaction until the advance, plus fees, is repaid in full.

Benefits of a merchant cash advance:

• Provides quick access to funding, often within a few days.

• Repayment is linked to the business's card sales, accommodating fluctuating revenue.

• No security required.

Fintech lenders

The rise of financial technology (fintech) has brought a wave of innovative lending solutions for businesses. Fintech lenders leverage technology and data analysis to provide fast and flexible financing options. These lenders often have simplified application processes, quicker decision-making, and customised loan terms that can better suit the needs of businesses.

Benefits of using a fintech lender:

• Streamlined application processes and fast approval times.

• Increased access to funding, particularly for businesses with limited credit history.

• Flexible loan terms and repayment options tailored to business requirements.

When considering a business loan, it’s important to explore alternative options beyond traditional bank loans. There are many options that could provide the necessary funding your business needs. 

Calculating the potential costs and repayment terms of these alternatives can greatly impact your decision-making process. Use our business loan calculator to estimate monthly payments and assess the affordability of different financing options tailored to your business's specific needs.

You can apply for funding and check your business credit score all in one place with Capitalise. Plus, you’ll have the option to speak with one of our Funding Specialists, who can help you find the solution that best fits your business needs.