A Sole Trader’s Guide to Alternative Finance

A Sole Trader’s Guide to Alternative Finance

If you're a sole trader operating in the UK, it's worth considering the alternative finance options available to you. Here's our guide, covering crowdfunding, peer-to-peer finance, and more.

By Jyoti Patel

There were 3.4 million registered sole traders in the UK in 2018, accounting for 59% of the UK’s total business population. Despite this, a growing number of sole traders find it difficult to secure funding that’s tailored to their specific needs, especially from traditional lenders.

As alternative finance providers look at different criteria to traditional lenders, they’re often able to approve applications which banks would reject. As such, it’s well worth looking into the alternative finance options available to you as a sole trader. Here are five examples to get you started:

Crowdfunding

Crowdfunding involves many individuals giving you a share of your overall funding goal as opposed to one lender offering you the whole sum. It’s a particularly popular method of raising funds among start-ups or product-based businesses.

If you’re reluctant to borrow money in the form of debt finance, then equity-based crowdfunding is worth looking into, as you can raise funds by selling shares (equity) in exchange for investment.

In order to run a successful crowdfunding campaign, you’ll need to have an excellent PR and marketing strategy to draw interest to your initiative. You’ll need to set a realistic funding target and reach it, otherwise the investment will be returned to any interested parties.

Peer-to-peer finance

Peer-to-peer lending (P2P) is loosely based on the concept of crowdfunding, though the main difference is that you’ll be seeking funding from multiple investors in the form of debt finance. This means you’ll have to pay the money back, plus interest, just like with a traditional loan. It’s a good option for sole traders who want to access debt finance without having to go to a bank or alternative finance provider.

Much like crowdfunding, P2P requires you to put your business before a panel of investors via a digital platform. Investors can choose which companies they’d like to invest in along with the amount they want to put forward. Once your business reaches its funding target, you receive the money and begin to repay interest to investors at an agreed rate.

Unsecured and secured business loans

Much like traditional banks, many alternative finance providers offer unsecured and secured business loans. Secured loans require a sole trader to offer something valuable, such as a property, as collateral against the loan. As such, they’re a good option for sole traders with a thin file or low credit score, as valuable assets will be able to offset this.

Because you’re offering collateral against the loan, you’ll usually find that a secured loan has lower interest rates than an unsecured loan. You’ll be able to borrow more, too. 

You won’t need to provide any collateral if you opt for an unsecured loan, but you may still need to provide a personal guarantee. This also means they are quicker to be approved than secured loans, as your assets don’t need to be valued.

Alternative finance providers will also be able to offer you the funds faster than many banks – generally, the application can be completed quickly online and the funds can be in your account within 48 hours of approval. However, as many alternative finance providers aren’t FCA regulated, they can only lend sole traders upwards of £25,000, so bear this in mind if you need a smaller amount of investment.

Invoice financing

Invoice financing is a way to borrow money against outstanding invoices before they’ve been paid by customers. The provider will send you around 90% of the invoice amount within 24 hours of receipt. They’ll send you the remaining 10%, minus fees, once the customer has paid the invoice.  It’s a good option to look into if you often find yourself out of pocket due to long payment terms, or if you want to raise working capital for your business fast.

There are two specific types of invoice financing available to sole traders. The first is invoice factoring, which involves the provider managing the whole invoicing process directly with customers. This means you don’t have to worry about collecting or chasing payments and can focus on running your small business. However, it does mean that your customers will be aware that you’re using a third party, which is something to consider if you want to remain in control of your customer relationships.

If you’d rather your customers remain unaware that you’re using an invoice finance provider, you can opt for invoice discounting. This involves you sending a copy of the customer invoice to the provider and receiving an advance.  You retain control of your invoicing process, and so this may be a better option if you want to foster relationships with your clients and remain in charge of your overall credit control process.

Government support

In addition to the above, it’s worth checking if there are any local or regional government grants available to you, especially if your small business contributes to your local economy by creating jobs, or if it creates products that can benefit the UK. A good place to start is by checking the gov.uk’s business support finder, which features a wide range of grants currently available across the UK.