Non-bank finance

If you are starting, expanding or restructuring a business, you may need to secure finance. People in business commonly approach banks for financing, but they are not the only option. Other lenders may be more competitive or more suitable for your business, such as:

• commercial loan providers
• peer-to-peer lenders
• social and community lenders
• invoice financiers
• government funding schemes

We collectively refer to these as non-bank finance. If your business has suffered recent losses, has a poor credit rating, is highly leveraged or has recently been turned down for bank finance – you may find non-bank finance easier to obtain, more flexible and possibly cheaper.

In this guide you will find an overview of the main types of non-bank finance available to you, including other options like joint ventures and selling shares. It also provides information on how to increase your chances of securing investment, and how to recognise and avoid unauthorised lenders, such as loan sharks.

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Types of non-bank financial support

Although it is common for people in business to approach banks for finance, there are other options available that may be a better fit for your business. Non-bank lenders may have lower interest rates and charges, and be able to make loans over a longer period than a bank. They can also be less restrictive about high loan to value and issues like poor credit rating or experience of recent losses.

It is important you read all agreements carefully before you borrow from a non-bank lender and find out if any assets will be required as security. Most non-bank lenders are reputable, but they are subject to fewer regulations than banks. see the page in this guide about avoiding loan sharks.

Commercial loan providers

Commercial loan providers – also known as non-bank finance companies and institutions – are organisations that provide financial services like loans and credit facilities, but don’t have a banker’s licence. This means they cannot take deposits from the public or offer normal banking facilities such as overdrafts. However, they can have less restrictive lending criteria and may be a useful and competitive source of funding.

Building societies offer personal loans and business mortgages, but differ from banks by being mutual institutions. This means they are owned by and run for their shareholders – rather than external shareholders.

If you need money for just a very short period – ie no longer than a month – you could consider a payday loan. See the page in this guide on non-bank funding for short and long-term use.

Sharia-compliant funding

Any type of business can consider Sharia-compliant funding, eg musharaka – an investment partnership where both parties agree profit-sharing terms in advance. Any losses are linked to the amount invested. Under Sharia law, all loans must be interest-free.

Peer-to-peer lending

Peer-to-peer lenders let you borrow money directly from savers – cutting banks out of the equation. Terms can be more favourable – eg no early repayment fees – and you may find you are accepted even though banks have turned you down. Also, some services are free to apply for and doing so won’t affect your credit rating – even if your application is rejected.

Read reviews of peer-to-business lending sites on the Which? website – Opens in a new window.

Social and community lending

You may be able to borrow money from a credit union which is likely to be more affordable than a bank loan. There are also various lenders that offer loans to disadvantaged groups, community businesses and social enterprises.

For more information see the page in this guide on social and community lenders.

Joint ventures and partnerships

One way to increase resources is to enter into a joint venture with another business. This can offer many advantages – such as increased capacity, access to new markets and the availability of greater technical expertise. However, you should give any joint venture careful consideration, as there are potential pitfalls too.

See our guide on joint ventures and partnering.

Working capital funding

It may be possible for you to raise funds against unpaid invoices. Invoice discounting, factoring or supplier finance can all be useful methods to improve your business’ cashflow. For more information, see the page in this guide on non-bank funding for short and long-term use. Alternatively, you may find you can improve your cashflow by negotiating longer payment terms with your suppliers.

Equity finance

You could sell shares in your business if you want to raise long-term finance. This would mean you won’t have to repay the debt or pay interest, but it will involve partly giving some ownership of your business and its future profits. For more information, see the page in this guide on non-bank funding for short and long-term use.

Family and friends

Family and friends can offer credit on a flexible, long-term and low-cost (or free) basis. You should make sure that the terms of any loan are clearly understood by both parties.

See our guide on financing from friends and family.

Government financial support

If your business is new or expanding, you could be eligible for business development grants or other government support schemes.

For more information, see our section on grants and government support.

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Social and community lenders

Social lenders – such as community development finance institutions (CFDIs) and credit unions – are generally non-profit making organisations that can offer loans and credit.

CDFIs

CDFIs lend to businesses, social enterprises, charities and individuals who intend to use the money to help and develop their local community. They are aimed at people and organisations that struggle to borrow from traditional sources such as banks and building societies.

Many CDFIs only lend in certain geographical areas and some of them don’t lend to businesses. They tend to focus on disadvantaged areas and disadvantaged groups. So, before you apply to a CDFI for finance, you need to make sure the way you plan to use the money qualifies.

Find out about CDFIs on the Community Development Finance Association’s (CDFA’s) Finding Finance website – Opens in a new window.

Co-operative and community finance

Employee-owned or community businesses can apply to borrow money from the Industrial Common Ownership Finance Fund. Eligible organisations include social enterprises, co-operatives, development trusts and charitable businesses.

Find out about loan eligibility on the Co-operative & Community Finance website – Opens in a new window.

Credit unions

Credit unions offer loans that are accessible and affordable. They are owned and controlled by their members. This means they have to make decisions that are in members’ best interests, rather than to make money for external shareholders. There are also no penalties for repaying loans early.

Find out about credit union loans on the Association of British Credit Unions Limited (ABCUL) website – Opens in a new window.

The Prince’s Trust

If you are aged between 18 and 30, you may be able to get financial support from the Prince’s Trust. The charity’s Enterprise Programme provides loans, grants and advice so that disadvantaged young people can start their own businesses. To be eligible, you need to be unemployed and unable to raise all the finance you need from other sources.

Read about the Enterprise Programme on the Prince’s Trust website – Opens in a new window.

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Non-bank funding for short and long-term use

There are alternatives to standard business loans that you may find are more suitable for your needs – particularly if you need the money for a particularly long or short period. Some of these options are also available from banks. Your type of business and its current needs will determine the choice of provider.

Short-term funding

If you have a temporary cashflow problem, eg non-payment from a creditor, short-term funding may be able to help. Short-term funding sources include credit cards, payday loans and invoice finance.

Credit cards are available from building societies as well as banks, and these can be used to make business purchases using credit. However, it is important that you keep track of your credit card spending, as it is among the most expensive forms of credit. See our guide on debit and credit cards for your business.

Payday loans are very short-term loans that can be applied for online or over the telephone. Interest is calculated on the amount you borrow and the agreed repayment date, which can range from one day to a maximum of one month. Rates of interest can be high, especially when compared by APR, but can be cheaper than an unarranged overdraft. You should always check that the lender is reputable. Download information on payday loans in the Office of Fair Trading (OFT) report Review of high-cost credit from the OFT website (PDF, 451K) – Opens in a new window.

Invoice finance offers ways to access working capital by unlocking the value of invoices – although interest rates and charges apply on the cash advanced. There are three main types of invoice finance:

• invoice discounting – this allows you to draw on funding secured against approved invoices
• factoring – this involves you selling your invoices to your financier for them to process
• supplier finance, also known as ‘supply chain finance’ or ‘reverse factoring’ – if your buyer offers this it can give the same benefits as factoring, but usually at a much lower cost

See our guide on factoring and invoice discounting: the basics.

Long-term funding

If you are looking to expand your business or fund a new product or service, longer-term funding and investment can help. Non-bank investors can be a good source for small businesses, as many are prepared to lend to riskier ventures, such as start-ups.

Equity finance can provide investment in exchange for a share of the company or its future profits. This could be through business angel or venture capital investment, or by issuing shares in your business – perhaps to family, friends or employees.

For more information, see our guides on equity finance, business angels, venture capital, shares and shareholders and raise long-term funding through debt capital markets.

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Securing non-bank investment

Before approaching a non-bank investor, you should make sure your business is investment ready by:

• keeping yourself well informed about your business finances
• having an up-to-date business plan
• being clear about the amount of money you require and what it will be used for
• carrying out market research to demonstrate that there’s a market for the products or services that you intend to sell
• producing cash flow projections for the next 12 months to show that you will be able to afford repayments, including interest and fees
• carrying out a SWOT analysis (strengths, weaknesses, opportunities and threats relating to your business)
• ensuring your business and personal credit ratings are up to date and error-free

For more information, see our guide on how to measure performance and set targets.

Getting the best deal

When looking for finance for your business, it is important that you choose the option that best suits your business.

You should compare different providers of non-bank finance – if necessary using a finance broker – and always read and research the small print of any investment offers.

Loan guarantees

Most non-bank lenders will ask you for some form of guarantee before granting a loan. This could include assets such as property owned by the business. You may also be required to ask another person or another business to act as a guarantor and guarantee the loan. The guarantee means that the lender will claim from the guarantor if your business cannot meet the repayments.

Some lenders will also require personal guarantees – eg from your board of directors or business backers.

Many loan providers require you to take out loan repayment insurance to cover repayments if your business meets cashflow problems.

For more information, see the page on providing a guarantee for your loan in our guide on bank finance.

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Avoiding loan sharks

Take care to avoid unauthorised lenders – otherwise known as loan sharks. An unauthorised lender may give you quick access to credit, possibly without needing a business plan or security, but there may be drawbacks including unfavourable interest rates and loan terms.

To find out if a lender is licensed by the Office of Fair Trading (OFT) you can search the Consumer Credit Register with the OFT.

You may be dealing with a loan shark if:

• the salesperson is pestering you or is particularly pushy
• the interest rate is significantly higher than other lenders
• the company is reluctant to show you the loan terms and conditions
• you are asked to tie yourself into a longer-term contract than you need

You may also find yourself a target for loan sharks if you have a poor credit record and would normally find it difficult to raise finance. Read advice on avoiding loan sharks on the Directgov website – Opens in a new window.

For information on how you may be able to secure non-bank finance, see the page in this guide on types of non-bank financial support.