Alternative Finance for SMEs: How to Choose

Most business borrowing in Britain no longer starts at a high-street bank. Challenger banks, specialist banks and non-bank lenders between them accounted for around 68% of all UK SME lending in 2025, so the alternative route is now the mainstream one for a great many businesses (British Business Bank, Small Business Finance Markets 2026). Invoice finance, asset finance, merchant cash advances and the fintech lenders are what that shift is made of.

Finding a lender is not the hard part. The difficulty is that these products are priced on completely different meters: a factor rate, a service charge plus a daily discount charge, a flat rate, an annual percentage rate, a slice of your equity. So the headline numbers cannot be set against each other, and the one that looks cheapest frequently is not.

Start with how your money arrives, then compare the cost in pounds and your personal liability if trade turns. We use those tests throughout, with fuller product explanations in our alternative business funding guide.

Alternative Finance for SMEs at a Glance

What Alternative Finance Means for an SME

For this guide, alternative finance means business funding that does not come from a high-street term loan or overdraft. That is our editorial definition rather than a regulatory one, and it is worth saying so plainly, because the label covers products that share almost nothing. A merchant cash advance and a hire purchase agreement sit in the same category while differing in price, in security and in what happens to you if a payment is missed.

What genuinely changes is the question the lender asks. A bank underwrites your credit history, your filed profit and whatever security you can put up. An alternative lender underwrites the thing your money comes from instead: your sales ledger, your card takings, your monthly revenue, or the asset itself. That can open another route when thin filed accounts do not satisfy a bank, but the fit is narrower than the category label suggests: the source and consistency of your revenue become central to the decision.

The Options Compared

Read the cost-basis column first. It is the one that stops you comparing a factor rate with an annual percentage rate, which is the most expensive mistake available in this market.

Speed in that table is the time to money once you have the paperwork ready, not the time to a quote. Invoice finance is the outlier: it is slow to put in place because the provider is underwriting your customers as well as you, and fast every time afterwards.

Which Type of Alternative Finance Fits Your SME?

Match the product to the source of repayment. Invoice finance follows customer invoices, merchant cash advances follow card takings, and asset finance is secured on the equipment itself. A lender’s advertising does not change that fit.

If Customers Pay You in 30–90 Days

Invoice finance is the direct fix, because it attacks the timing rather than borrowing around it. A provider advances a proportion of each invoice as soon as you raise it (the British Business Bank puts this at up to 90%, and uses 80% in its own worked example), then releases the balance, less charges, when your customer pays. The proportion is set by the quality of your debtor book rather than by your own accounts, which is why it suits businesses with thin profits and dependable customers.

It works badly in three situations: if you sell to consumers, if your invoices are small and numerous, or if your turnover is below roughly £300,000, under which the British Business Bank notes a traditional facility is generally unsuitable. Our invoice finance comparison covers the providers worth approaching.

If You Are Buying Equipment or Vehicles

Asset finance is almost always cheaper than borrowing the same amount unsecured, for the plain reason that the lender can take the asset back. Hire purchase ends with you owning the equipment; a finance lease leaves it with the lender and usually costs less each month. The trade-off is that the asset is committed for the term, so leaving early is rarely clean, and a specialist item with a poor resale market will attract either a worse rate or a deposit. Using a general-purpose loan for a purchase that asset finance would cover is simply a more expensive way to buy the same machine.

If Your Takings Come Through a Card Machine

A merchant cash advance repays as a share of your daily card sales, so a quiet week costs you less and a busy one clears the balance faster. That can suit seasonal retail and hospitality because repayments rise and fall with the takings available to meet them.

It is also the dearest money on this page, and none of the three largest UK providers we track publishes what it charges. The cost does not fall if you repay quickly either: the fee is fixed the day you sign, so clearing it early raises the effective annual rate rather than lowering it. That runs backwards from every other kind of borrowing, which is why we set it out in pounds and in annual terms further down.

If You Need a Reusable Working-Capital Buffer

A revolving facility lets you draw, repay and redraw against a limit. It beats a term loan whenever the need recurs rather than happening once, because you pay only for the days you hold the money. iwoca’s Flexi-Loan charges from 1.5% per 30 days on the drawn balance with no charge for repaying early, which makes a short cash gap cheap to cover. That same design makes it expensive if you draw the limit and leave it out: iwoca’s own representative rate is 49% APR. The product is cheap for short draws and dear for long ones, and the discipline is yours to supply.

If Your Bank Has Declined You

Find out why before applying anywhere else, because the reason decides whether any lender will say yes. A decline on affordability is a different problem from a decline on thin filed accounts, and only the second is solved by changing lender. If your bank is one of the nine designated under the Bank Referral Scheme, it has to offer to pass your details to a finance platform. That route, and the community lenders that exist for businesses in exactly this position, are covered in full below.

If You Are Under Two Years’ Trading

Trading history rules out more businesses than any other criterion, and it is also the easiest to work around. Fintech lenders underwrite your bank feed rather than your filed accounts, so six months of clean statements can carry an application where two years of accounts do not yet exist. A Start Up Loan at 7.5% fixed is the other route, though it is a personal loan in your own name rather than company borrowing, which matters more than the rate does. If you are not trading at all yet, neither works, and the realistic options are a Start Up Loan, a grant or equity.

If You Will Not Give a Personal Guarantee

Decide whether you will give a personal guarantee before comparing rates. A personal guarantee makes you liable for the company’s debt out of your own assets, and Funding Circle, iwoca and Capify all require one as standard. Asset finance and invoice finance are the usual way around it, since both take security over a thing (the equipment, or the invoice book) rather than over you, although a guarantee can still be asked for on top. Equity finance involves no guarantee at all, which is worth remembering before writing it off as the expensive option.

What It Actually Costs: £25,000 and £50,000 Compared

The same £25,000, borrowed for the same twelve months, costs between £944 and £7,500 depending on nothing but which structure you use. Every figure below is either a rate the provider publishes, with the date we checked it, or our own calculation with the assumptions shown. Where nobody publishes a rate, we say so rather than borrowing a number from a broker.

£25,000 Over 12 Months

Two rows in that table deserve a second look. The first is that the government scheme is not the cheapest one. A Start Up Loan at 7.5% fixed costs £83 more across the year than Funding Circle’s advertised 6.9%. Schemes are always worth pricing, and they are frequently the only offer a young business receives, but “government-backed” is not a synonym for “cheapest” and the arithmetic will not support treating it as one.

The second is the distance between the two fintech rows. Funding Circle advertises from 6.9% a year and iwoca’s representative rate is 49% APR. Both are real, both are published by the lender, and they are roughly seven times apart. Any article that hands you a single “fintech loan rate” has invented it.

£50,000 Released From Your Invoice Book

Invoice finance is priced for time, so the comparison only means anything once you fix how long you need the money. Take a business owed £50,000 that needs the cash for 45 days while it waits to be paid. To release £50,000 you need rather more than £50,000 of invoices behind it: at a 90% advance you need £55,556 of cover, and at the 80% the British Business Bank uses in its worked example you need £62,500.

The cost then splits in two. The discount charge is interest on what you have drawn, quoted as a margin over the Bank of England base rate, which is 3.75% and was held there on 29 July 2026. At a 3% margin, £50,000 drawn for 45 days works out at about £416. The service charge is the second half, levied on your turnover, and it is the number that decides whether the facility is good value or poor.

Nobody publishes it. We could not find a single major UK invoice financier quoting a service charge publicly; Kriya states an advance rate of up to 90% and no pricing at all, and the picture repeats across the market. Ask for the service charge as a percentage of turnover, then ask what that comes to in pounds against your actual sales, and get both in writing before you sign anything. A facility quoted only as a percentage is not a quote you can compare.

For the same 45 days, an iwoca Flexi-Loan at 1.5% per 30 days would cost £1,125 on £50,000, with no service charge and nothing to pay for clearing it early. Funding Circle does not compete for this at all, since its shortest term is six months. That is the real shape of the choice: invoice finance is usually cheaper for a genuine receivables gap once you know the service charge, and a revolving facility is more predictable precisely because it contains only one number.

Why Factor Rates, APRs and Invoice Fees Are Not the Same Number

A factor rate is a fee, not a rate of interest, and the difference costs businesses real money every week. At a factor rate of 1.3 you repay £32,500 on a £25,000 advance. The £7,500 does not move. It does not shrink if you repay early and it does not grow if you take longer, because it was fixed the day you signed.

Express that as an annual rate and the effect runs backwards compared with every other product you have ever borrowed on:

Strong trading clears the advance faster, and clearing it faster makes the money more expensive in annual terms rather than less. This is the most misunderstood mechanism in alternative finance, and it is why setting a 1.3 factor rate against a 6.9% APR tells you nothing whatever. Convert before you compare, and read any factor rate you are quoted as a fee you have already agreed to pay in full.

How We Calculated These Figures

Loan costs are worked on equal monthly repayments across the stated term at the rate each provider publishes. Those rates come from our own provider records, last checked between 10 and 13 August 2026: Funding Circle from 6.9% a year, iwoca at 49% APR representative and 1.5% per 30 days on the Flexi-Loan, both requiring a personal guarantee.

The merchant cash advance figures are illustrative, and labelled as such wherever they appear, because Capify, Liberis and 365 Business Finance all decline to publish a factor rate or any equivalent annual figure. We use 1.3 to demonstrate the mechanism, not to assert a market rate. The effective annual rates are ours, solved from the total repaid over each period.

The invoice finance discount charge uses the Bank of England base rate of 3.75% plus a 3% margin, stated as an assumption rather than a quotation. All of these are illustrations built to let you compare structures against each other. None is an offer, and your own rate will turn on your accounts, your customers and what security you can give.

What to Do if Your Bank Has Turned You Down

Find Out Why It Failed

Ask for the reason in writing and read it before you apply anywhere else. A decline on affordability means the lender believes the repayments would break you, and going to a more expensive lender makes that worse rather than better. A decline on trading history, filed accounts or sector is a different matter entirely, and those are precisely the things alternative lenders underwrite around. Several applications in quick succession leave a visible trail on your credit file, so a week spent on the reason is better value than a month spent on applications.

The Bank Referral Scheme

Since November 2016 the nine largest UK banks have been required to offer any small business they turn down a referral to a designated finance platform: currently Alternative Business Funding, Funding Options and Funding Xchange. It costs nothing, your details go nowhere without your consent, and it is worth accepting.

It is also worth knowing the odds rather than resting on it. To 31 March 2026 the scheme had taken 132,636 referrals and produced 6,905 deals worth £161.7m, at an average of £23,430. That is a conversion rate of 5.2%, or roughly one in twenty (HM Treasury, Bank Referral Scheme: Official Statistics, published 13 July 2026). The rate has been improving, reaching 8.1% in the final quarter of 2025, but this is a useful extra route and not a safety net.

CDFIs and Community Lenders

A community development finance institution, usually shortened to CDFI, lends to viable businesses that mainstream lenders have declined, and reaches its decision by looking at the business rather than by scoring it. Between them they lent £181.4m to 6,869 start-ups and small businesses in 2025, 21% more than the year before and a fourth consecutive record (Responsible Finance, Impact Report 2026).

They are slower than a fintech lender and they are not cheap in absolute terms. They also exist for precisely the position a declined business is in, and we recommend approaching one before you accept that the answer is no. Responsible Finance maintains the directory of members and the list is short enough to work through in an afternoon.

When Borrowing Again Is the Wrong Answer

If the problem is that the business cannot afford the repayments, more expensive borrowing does not solve it; it shortens the runway. The warning signs are worth naming plainly. Taking a second advance to clear the first, drawing on a facility to cover payroll every month rather than occasionally, and borrowing to pay HMRC are all the same signal.

Stacking facilities is the version that does most damage, because each new lender takes its share of the same daily takings and the business ends up working for the advances. At that point the useful conversation is about the cost base, a Time to Pay arrangement with HMRC, or formal advice, not about finding another lender.

Is Alternative Finance Regulated, and What Protects You?

Treating this as one question is how businesses end up believing they hold protection they do not have. It is really four, and they have different answers: whether the activity is regulated, whether you can complain to the Financial Ombudsman Service, whether the Financial Services Compensation Scheme is relevant, and whether you have given a personal guarantee.

FCA Regulation

Most commercial lending to limited companies sits outside the Financial Conduct Authority’s remit. Lending to a sole trader or a small partnership can fall inside it, because an agreement under £25,000 for business purposes can be a regulated credit agreement. The same product can therefore be regulated for one borrower and unregulated for another, which is not a distinction lenders tend to volunteer. Ask which applies to your agreement, and ask before you sign rather than after.

When You Can Go to the Financial Ombudsman

This is a separate question from FCA regulation, and the answer is more generous than most business owners expect. The Financial Ombudsman Service can consider a complaint from a business with turnover under £6.5m that also has either a balance sheet under £5m or fewer than 50 staff. When the FCA set those thresholds it estimated they brought 99% of the UK’s 5.6 million private-sector businesses inside the service.

Directors who have given a personal guarantee over a loan to their own business can complain in their own right as well, which is not widely known. The service is free to use. The condition that actually bites is that the firm you are complaining about must be authorised by the FCA for the activity in question, which is where the perimeter question above comes back round.

When FSCS Applies, and When It Does Not

The Financial Services Compensation Scheme protects deposits. It has never protected borrowing, and no lending product on this page is covered by it in the way businesses often assume when they see the logo on a lender’s website.

Where it does matter is the other side of your balance sheet. Money your business holds with an authorised bank or building society is protected up to £120,000 per firm. If a facility runs through an e-money account rather than a bank account, check which you have, because e-money is safeguarded rather than FSCS-protected and the two work differently if the provider fails. One reassurance is worth stating: a lender collapsing does not cancel your loan. The debt is an asset and it gets sold on.

Personal Guarantees and Security

A personal guarantee is the term most likely to reach you personally, and it sits outside all three questions above. It makes you liable for the company’s debt from your own assets (savings, and in the worst case the house), and it survives the company failing. Funding Circle, iwoca and Capify all require one as standard on their published terms, on our latest check in August 2026.

Read what it actually covers before you sign. Whether it is capped or unlimited, whether it is joint and several with your co-directors, and whether it extends to future facilities are the three terms that decide how exposed you are. Personal guarantee insurance exists and is worth pricing, though it is not cheap and it covers only a proportion of the debt.

Government-Backed Options to Price First

Price these before the commercial market, and price them properly: the assumption that a government scheme must be cheaper does not survive the arithmetic above. Our guide to government-backed business finance covers the full set.

Start Up Loans

A Start Up Loan is £500 to £25,000 per founder at 7.5% fixed, repayable over one to five years, and up to £100,000 can go into a single business across several eligible founders. The rate has been 7.5% since 6 April 2026, and the free mentoring that comes with it is often worth more to a first-time founder than the rate itself.

The part that gets missed is whose loan it is. This is an unsecured personal loan in your name, used for business purposes. There is no security and no personal guarantee, for the straightforward reason that neither is needed: you are already the borrower. If the business fails, the debt stays with you.

The Growth Guarantee Scheme

The Growth Guarantee Scheme supports facilities of up to £2m through accredited lenders, with the government guaranteeing 70% of the balance. That guarantee protects the lender, not you. You remain liable for 100% of the debt, and the purpose of the scheme is to persuade a lender to say yes to a business it would otherwise decline.

A change announced on 12 July 2026 raises the turnover ceiling from £45m to £54m and allows terms of up to ten years. Accredited lenders are still working that through, so ask a specific lender what it is offering today rather than assuming the announced terms are already available.

How to Apply

Most applications are online, and most decisions now come off your bank data rather than your filed accounts. Connecting an Open Banking feed and uploading three to six months of statements is usually the whole process, and a decision often arrives the same day.

Have ready: recent business bank statements, your card-processing statements if you are applying for a merchant cash advance, an up-to-date list of who owes you what for invoice finance, and management figures if your last filed accounts are stale. Merchant cash advances and revolving facilities commonly fund within 24 to 48 hours. Invoice finance takes longer to set up, because the provider is underwriting your customers as well as you, but once it is running it releases cash against each invoice within a day.

Use a soft-search comparison before you make formal applications, since those leave a mark and soft searches do not. Check as well whether the platform you are using is a lender or a broker: Tide Funding Options, for instance, is a credit broker that matches you to lenders rather than lending itself, as is the case with most comparison and matching services.

Alternative Finance for SMEs FAQs