For businesses that are finding it difficult to gain access to capital through traditional lending sources, such as high street banks and lenders, worry not. Today, there is a plethora of alternative finance options available to entrepreneurs and established business owners.

The alternative finance sector is rapidly evolving, including challenger banks becoming part of the funding ecosystem. For many entrepreneurs it can be hard to keep up with the pace of change and stay up-to-date with the best funding solutions for start-ups and growing companies. That’s why we have written this guide to many of the best alternative funding sources available to London’s businesses.

Financial advice and funding strategy support for Workspace customers

Workspace customers have free access to our partner Informed Funding. They are an on and offline information resource designed to help businesses identify the range of alternative finance options available to them. You can arrange a free one-to-one consultation with an Informed Funding financial and funding strategy expert, as well as secure a place at one of the many finance seminars and workshops held across London here.

  • Debt Crowdfunding

Commonly referred to as crowd lending, debt-based crowdfunding is similar to securing a loan from a high street bank in many ways, but often with much lower interest rates. A debt crowdfunding investor will stump up capital to a growing business, receiving shares for their investment.

The medium to long-term expectation is that the investor will not only receive dividends on profit shares, they may be able to sell their shares on for a profit if the business continues to grow. Meanwhile the business agrees to repay the initial loan over a fixed repayment term.

  • Micro Loans

Start-ups and small businesses can avail themselves of micro-lenders and non-profit organisations that offer short-term micro loans to be repaid over a maximum period of around five years. The term micro dictates that the size of the loans also tend to be no greater than £10-£15,000.

  • Crowdfunding

Crowdfunding portals such as Funding Circle and Crowdcube offer a wealth of lending opportunities for start-ups and entrepreneurs. They can pitch on crowdfunding websites for a sizeable investment figure in their business model, with the ability for multiple investors to invest small amounts towards achieving that final total.

Unlike traditional forms of business finance, crowdfunding money is not directly repaid. Start-ups may instead opt to offer their investors some form of service in return for their financial support, such as a free sample of their product.

  • Angel Networks

One of the most typical forms of alternative finance for start-ups and early-stage companies is via a group of ‘business angels’. These tend to feature highly-successful, self-made entrepreneurs who look to acquire shares in potentially lucrative early-stage companies using their own funds.

  • Private Equity

More common with established companies, private equity investors can help businesses accelerate their growth by expanding into new markets or purchasing competitors to consolidate their position within a sector. A typical private equity deal may lead to a complete buy-out of the company’s senior management, while some owner-managers may prefer to stay in charge whilst realising a small percentage of their equity value.

  • Venture Capital

Venture capital provides long-term monetary investments in exchange for equity in a business. The money is invested by wealthy individuals or venture capital funds consisting of pooled resources from individuals and institutions. Unlike bank loans and other forms of financing, there is no interest paid on venture capital and the money does not need to be repaid (unless agreed upon in advance). Because of this it is a form of ‘risk capital,’ which means the creation of future profits is uncertain.

  • Public Equity

Companies are within their rights to float themselves on the public stock markets like the London Stock Exchange, offering shares in exchange for investment. For companies seeking to raise over £5,000,000 through a public share issue, they must release a full prospectus – a legal documentation compliant with the EU Prospectus Directive.

  • Asset Finance

Start-ups or entrepreneurs seeking expensive equipment to help get their business ideas off the ground can look to asset finance – the ability to acquire the tools needed, such as machinery or IT equipment, without having to pay the full cost up front. Instead, assets are paid for over the lifetime of the lease in instalments.

  • Company Credit Cards

Some entrepreneurs and start-ups choose to apply for short-term credit cards, allowing them to borrow money interest-free for up to 56 days, provided that the card balance is cleared in full each month.

  • Commercial Mortgages

For start-ups seeking funds to acquire their own premises, a commercial mortgage is possible, varying from less than three years to more than 20, depending on the terms of the agreement. The mortgage is secured on the property being financed via an initial charge.

  • Early Stage and Development Loans

Businesses that are still at a relatively young stage in their development but trading profitably and don’t have enough assets of their own to secure a traditional loan can attempt to raise development funding from potential lenders. Though, be prepared for higher interest rates as the loan is unsecured against any type of asset.

  • Invoice Factoring

Invoice factoring, sometimes referred to as ‘factoring’ or ‘debt factoring’ is a financial product that enables businesses to sell unpaid invoices (accounts receivable) to a third-party factoring company (a factor). The factoring company buys the invoices for a percentage of their total value, then takes responsibility for collecting the invoice payments.

Invoice factoring is a suitable source of funding for those who don’t have in-house accounting or finance departments and don’t have the time to be chasing late payments.

  • Mini-Bonds

An issue of a mini-bond enables a growing company to raise debt funding from a group of individual lenders, usually their customers. The majority of mini-bond issues are unsecured loans and must be held for their full term or until the borrower opts to redeem it.

  • P2P Loans

Peer-to-peer (P2P) lending platforms  arrange loans from groups of individuals or organisations to entrepreneurs looking to grow. It’s a way for a business to get funding without having to visit a bank, and lenders can use the platform like a marketplace, where they choose who they want to lend money to. It’s important to understand the risks attached to P2P lending, so be sure to read advice before starting.

  • Pension Backed Loans

The ability to receive a commercial loan against a business owner’s pension pot. Workspace partner Informed Funding has a dedicated section on this type of loan:

“Pension-based lending enables business owners to use their pension savings to lend funds to their company at commercial rates. Security is taken against business assets, which can include a range of intellectual property, provided it has been professionally valued. Transactions are arranged either as loans or as a sale of company assets to the pension fund that are then leased back to the company for a set period.”

  • Single Invoice Finance

Entrepreneurs can raise finance against any individual invoice, rather than financing their entire sales ledger, as with invoice factoring. This specialist form of finance is usually offered in an online auction format, where investors bid to take the invoice on.

Get more finance advice with Workspace

As part of our partnership with Informed Funding we are offering a WBI Dinner event around the subject of funding and business finance. Featuring speakers Lisa Rodwell, Venture Partner at MMC Ventures & Chief Customer Officer at Nutmeg based at Vox Studios and Laura Willming, Venture Partner at Octopus Ventures, you can sign up here to attend.

Read more about how to make the most of funding options for your business, stories from our customers and news from the finance market on our Community section Try Show me the Money and Understanding Your Profit and Loss Account to get started.