Top alternative funding options for small businesses

What is an alternative source of business funding in the UK?

Essentially, it's any way of raising the cash your business needs that doesn’t involve a standard business loan, credit card or overdraft. Many new options have started to emerge in recent years, ranging from government grants and peer-to-peer lending to crowdfunding and invoice finance.

These alternatives can give you access to cash, often with more flexibility and without the strict terms of more traditional lending. The right option for your business depends on how quickly you need the money and whether you’re willing to give up equity or take on debt.

Small business funding options

You can access business funding in more ways than you might think. Here, we share eight options that are popular among small businesses, along with the different benefits, costs, and requirements for you to consider.

1. Angel investment

Angel investors are private individuals who put their own money into early-stage businesses in return for equity. If you’ve seen shows like Dragon’s Den or Shark Tank, you’ll know the concept. But angels usually offer more than just funding, as they often bring valuable expertise and a network of industry contacts to help a business grow.

While you might be able to borrow sizeable chunks of cash, you also give up a share of your business and some decision-making control, too.

This route tends to work best for businesses with high growth potential and a clear plan for scaling, because angels eventually want to see a return on their investment.

2. Asset finance

Asset finance helps you buy or lease equipment or machinery without paying the full amount up front. Funding can range from a few thousand to several million pounds, depending on the asset you need. 

This may be a good option if your business needs essential tools and a steady cash flow, because you can spread the cost over time with asset finance. Just remember that interest and fees can make it more expensive overall, and missed payments could result in you losing the asset.

3. Business government grants

Grants range anywhere from a few hundred pounds to hundreds of thousands, depending on the scheme. There are different grants and schemes available to cover businesses in a range of sectors and regions, so long as the business meets certain criteria. 

Grants don’t need to be repaid and can boost your business’s credibility, but they’re highly competitive and often come with restrictions on how the money can be used.

Types of grants include:

• Innovation and research funding – Supports projects developing new products or technologies

• Regional or local business grants – Aimed at boosting local economies or creating jobs in specific areas

• Training and skills development grants – Intended to help with upskilling staff or bringing in apprentices

• Environmental and sustainability grants – Offer funding for projects that improve energy efficiency or reduce environmental impact

You can search the full list of current government grant schemes to find options that match your business.

4. Crowdfunding

Crowdfunding enables you to raise money from the public via online platforms such as Indiegogo and Kickstarter. 

How much you raise depends on how much traction your campaign picks up. Sums raised go from a few hundred pounds to tens of thousands. It works well for consumer-facing businesses or those with strong public appeal. 

While crowdfunding lets you build an audience and validate your idea, running a successful campaign takes significant marketing effort, and there’s no guarantee you’ll reach your funding target. Be sure to check the fine print as well, because some campaigns don’t pay out if the target isn’t met. 

5. Equity and debt finance

Equity finance involves selling shares in your business, while debt finance means borrowing money you repay over time – perhaps through a loan or line of credit.

Amounts vary widely, from thousands to millions, helping businesses that are looking for a substantial cash injection to grow. Bear in mind that equity finance removes repayment pressure but reduces your overall ownership stake, and while debt finance might keep you in control, it does come with interest costs and repayment obligations.

6. Invoice finance

Invoice finance unlocks cash tied up in unpaid invoices. A lender pays you a percentage of the invoice value in advance, meaning you don’t have to wait for your customers to pay up. How much you can access depends on your turnover and the value of your customer invoices. 

It’s ideal if your business deals with long payment cycles and has reliable customers, because it can improve cash flow quickly, but you do pay fees on the advance and may get less than the full invoice amount up front.

7. Peer-to-peer (P2P) lending

P2P lending connects you directly with individual lenders online. It works much like a bank loan, but instead of borrowing from one single lender, you can borrow from several individuals or businesses that agree interest rates and repayment terms.

A good credit score is helpful with P2P lending, and if everything checks out, it can sometimes provide a faster decision than you find with a bank loan.

Rates can be competitive, but you still take on debt and must meet the repayment terms.

8. Start Up Loan scheme

The UK government-backed Start Up Loan scheme offers personal loans of up to £25,000 for new businesses at a fixed interest rate of 6% per year. You can repay it over one to five years, and enjoy 12 months of free mentoring. It’s aimed at entrepreneurs starting out with a clear business plan, so if you’re interested, make sure your plan is in good shape.

You can also find startup loans from banks and alternative lenders, although rates and terms vary. While startup loans via lenders provide essential capital, they add a repayment commitment from day one.

What is the best source of funding for my business?

The best source of funding depends on several factors, including: 

• The stage your business is at

• Your cash needs

• Your appetite for risk

• Repayment and ownership preferences 

Startups may benefit from grants, crowdfunding or angel investment, while established businesses with a trading record might prefer invoice finance, asset finance or P2P lending. 

If keeping ownership matters most, you might want to avoid equity finance entirely and focus on debt-based or non-repayable options, such as grants. 

Whatever you do, always compare the total cost, any eligibility criteria, and how quickly you can access the funds before applying.

Pros and cons of alternative business funding

Alternative funding can open up opportunities that traditional lenders can’t match. But every option comes with trade-offs, so it’s important to weigh them up before deciding.

Here are a few pros and cons to bear in mind:

Pros

• Wider choice of funding options to suit different business needs

• Faster approval and access to funds compared with some traditional loan options

• Potential to secure funding without taking on debt

• Can provide added benefits such as mentoring, networking or audience growth

Cons

• Some options require giving up equity and control

• Costs, fees or interest rates can be higher than bank loans

• Competitive application processes for grants and investment

• May involve extra admin, marketing or reporting requirements

Read more …

• Business loans explained

• Am I eligible for a business loan?

• How to get a business loan?