What is alternative finance for SMEs?

Alternative finance for SMEs means business funding that comes from outside the mainstream high street banks. It covers specialist and online lenders, invoice and asset finance providers, merchant cash advance providers, and peer-to-peer and crowdfunding platforms. It is not one product but a range of options built around how a business actually trades, which is why it often helps firms that a bank has turned down or cannot serve quickly enough. Smart Funding Solutions arranges both bank and non-bank finance, and this guide explains what the alternatives are and how to judge them.

01How alternative funding differs from bank finance

Banks tend to lend against established accounts, strong credit history and, often, property security. Alternative lenders may instead look at your revenue, card takings, unpaid invoices or the value of equipment. In practice, that usually means:

• faster decisions: many use digital applications and open banking, so decisions can come within a few working days once a lender has everything it needs
• more flexible structures: repayments can be linked to revenue, invoices or specific assets rather than a fixed monthly amount
• broader eligibility: younger businesses, seasonal firms and those with limited assets may find more options
• often a higher cost: convenience and risk are priced in, so always compare the total amount repayable

For a side-by-side comparison, and what to do after a bank decline, see banks vs alternative lenders.

02Main types of alternative funding

Invoice finance comes in several forms: factoring includes credit control by the provider, invoice discounting leaves collections with you, and selective facilities fund chosen invoices only. Merchant cash advances can be expensive, so check the total repayable before you commit.

03When SMEs typically use alternative funding

• a bank has declined, or its process is too slow for the need
• cash is tied up in unpaid invoices or stock
• a large tax bill falls at an awkward time
• seasonal trading creates predictable gaps in cash flow
• the business needs equipment but wants to keep cash in reserve
• turnover is good but assets are limited or the trading history is short

04Benefits and risks

05Is alternative funding suitable for start-ups?

Sometimes. Specialist lenders can be more open to young businesses than banks, but products linked to revenue or card sales need a trading record to lend against. Very early-stage firms often start with start-up loans, grants, asset finance or equity. See our page on start-up business loans.

06How long does alternative funding take?

Alternative funding typically takes anywhere from a few working days to several weeks, depending mostly on the product and how much the lender has to check.

• Unsecured loans and merchant cash advances: often decided within days, as they rely on bank statements and card data shared through open banking.
• Asset finance: often a few days to a couple of weeks, longer for used or specialist kit that needs valuing.
• Whole-turnover invoice finance: typically two to four weeks, because the provider audits your sales ledger and checks your customers.
• Crowdfunding: usually the slowest, as a campaign has to be prepared, approved and then attract investors.

Our guide to how long a business loan takes explains what speeds up or slows down a decision.

07What security do alternative lenders take?

Alternative lenders usually secure their money on whatever the facility is built around, plus a personal guarantee from the directors, rather than on property.

With asset finance the equipment itself is the security, and on hire purchase or leasing the funder owns it until the agreement ends. Invoice finance providers take the debts and normally a debenture over the company. Unsecured loans rely on a director's guarantee, and merchant cash advances on a share of future card takings, sometimes with a guarantee as well. Property can still be offered for a larger or cheaper secured business loan. Our guides to secured versus unsecured loans and personal guarantees explain what is at stake.

Alternative funding typically takes anywhere from a few working days to several weeks, depending mostly on the product and how much the lender has to check.

08How to choose the right option

1. Define the purpose: stock, tax, equipment, payroll or an acquisition each point to different products.
2. Work out affordability: test repayments against a realistic, not best-case, cash flow forecast.
3. Prepare your information: recent bank statements, accounts or management figures, and details of existing borrowing.
4. Understand how lenders will judge you: our guide to how lenders assess business loan applications covers the checks.
5. Compare on total cost: look at fees, repayment frequency, early settlement terms and any guarantees, not only the headline rate.

Smart Funding Solutions is a commercial finance broker, not a lender. We search our panel for facilities that fit your purpose and position. It is free to enquire; if a broker fee applies, it is disclosed separately before you proceed. To weigh up non-bank options for your business, arrange a confidential discussion.