A Sole Trader’s Guide to Alternative Finance

If you're a sole trader in the UK, it's important to explore all the alternative finance options available to you. Many traditional lenders, like banks, may not offer you the funding you need, but alternative finance providers can help. This guide covers some key funding options, including crowdfunding, peer-to-peer lending, and more.

In 2023, there were 3.1 million registered sole traders in the UK, representing 56% of the total business population. Despite their large number, many sole traders find it difficult to secure funding from traditional lenders, especially when they need small business loans. Thankfully, alternative finance providers are more flexible and willing to consider applications that banks might reject. Here are five finance options to get you started:

Crowdfunding

Crowdfunding is when many people contribute small amounts to help you reach your total funding goal. Instead of relying on one lender, you can get support from multiple people. This method is especially popular among start-ups and product-based businesses.

If you're not keen on taking on debt, equity-based crowdfunding might be a good fit. With this option, you raise funds by selling shares in your business in exchange for investment. To succeed in crowdfunding, you’ll need a good PR and marketing strategy to get people interested in your project. You also have to set a realistic funding goal because if you don't reach it, the money will be returned to the contributors.

Peer-to-peer finance

Peer-to-peer lending (P2P) lending works similarly to crowdfunding, but instead of receiving donations, you borrow money that you have to repay with interest. This makes it more like a traditional loan. However, P2P lending platforms connect you with multiple investors, not just one bank.

To secure business loans for sole traders through P2P lending, you'll need to present your business to potential investors on an online platform. Investors can choose which businesses they want to support and how much they want to invest. Once you meet your funding goal, you’ll receive the money and start repaying the investors with interest. This can be a good option if you’re looking for a loan for small business needs without going through a bank.

Enjoying this article?

Sign up to receive regular insights to your inbox.

Unsecured and secured business loans

Many alternative finance providers offer small business loans that are either secured or unsecured. Secured loans require you to provide something valuable, like property, as collateral. These are a good choice if you have a low credit score because the collateral helps reduce the lender's risk. As a result, secured loans often come with lower interest rates, and you may be able to borrow more money.

On the other hand, unsecured loans don't require any collateral, but you may need to provide a personal guarantee. Unsecured loans are usually approved more quickly because there’s no need to assess the value of your assets. They’re also popular with sole traders who need fast access to funds, as you can get approval within 48 hours from many alternative finance providers.

One downside of alternative lenders is that they’re not always regulated by the Financial Conduct Authority (FCA). This means they can only lend sole traders £25,000 or more. If you need a smaller loan for your business needs, you may need to consider other options.

Invoice financing

Invoice financing is a great way for sole traders to access money that’s tied up in unpaid invoices. With this method, a finance provider will give you about 90% of the invoice’s value upfront, and you’ll receive the remaining 10% (minus fees) when the customer pays the invoice. This can be especially helpful if you’re struggling with long payment terms and need to keep your cash flow steady.

There are two types of invoice financing available. The first is invoice factoring, where the finance provider manages the entire invoicing process, including chasing payments from customers. This option saves you time, but your customers will know that you’re using a third-party provider, which could affect your business relationships.

If you want to keep control of your invoicing and customer relationships, you can opt for invoice discounting. With this method, you remain responsible for collecting payments, but you still get an advance on the invoice amount. This can be a good option if you want to maintain a personal connection with your clients.

Government support

Don’t forget to check for government grants and other support available to sole traders. There are many local and regional grants designed to help small businesses that contribute to their communities. If your business is creating jobs or developing products that benefit the UK, you may be eligible for financial assistance. You can start by checking the government’s business support finder which features a wide range of grants currently available across the UK.