Since the 2008 financial crash lending to small-to-medium-sized enterprises (SMEs) in the UK has shrunk to unprecedented levels, with the value of bank loans issued to SMEs through the government's small business lending scheme falling to just £55.6 million in the last quarter of 2018, down 78 percent from its peak of £255 million in 2009.
However, where the big banks have rescinded from this space a funding vacuum has been filled by a host of innovative new lenders, leveraging data and new open banking rules to offer more flexible and timely loans to small businesses and startups.
First off a quick refresher on what debt finance is and how it is different to equity finance, which is your typical venture capital model. In short, debt finance involves taking money from a lender in exchange for interest on that loan or guaranteed against an asset. This is different to equity finance, where you give up a share of your business in exchange for investment.
Debt finance is often needed to fill a working capital need, so to pay your staff when cash supplies are low, for example. The disadvantage of debt finance is that it is just money, and you won't get access to any of the contacts or expertise of an angel or venture capitalist investor.
Here we list some of the best of the new breed of debt finance lenders, whether you are looking to borrow a grand or a million.
Find out how the government is supporting UK small businesses with its Bounce Back Loan Scheme.
Iwoca was founded eight years ago with the promise to provide overdraft facilities and loans in a matter of hours. The company says it now holds 12 percent market share of new small business overdrafts as of the fourth quarter of 2018, according to Yahoo Finance. That is more than incumbents like Santander (nine percent) and HSBC (11 percent).
The lender is already looking to leverage new open banking regulations to access customer's financial information to make this process even more seamless. By plugging directly into customer's financial data, with their permission, Iwoca can reduce the risk of human error or fraudulent document submissions. It has already built integrations with the likes of Barclays, HSBC and Lloyds Bank to allow small businesses that bank there to apply for loans or a credit facility quickly and easily by giving them direct access to five years of transaction history instantly.
Iwoca can lend up to £200,000 in unsecured business loans - which means it isn't guaranteed against an asset - at the time of writing, which is capped at one month’s revenue, or up to £10,000 for a startup business. It also offers a business loan product for longer term loans, lending £25,000 to £250,000 for up to 5 years at a starting rate of 4.5% p.a.
What you get: Iwoca lends between £1,000 - £200,000 at a maximum 12-month term. It promises funds will be in your account within hours. You can repay the loan on flexible terms by logging into your account and will only be charged interest on days you have funds. Interest rates vary from 2% to 6% per month depending on the length of loan term.
Founded in 2010 by CEO Samir Desai, UK managing director James Meekings and Andrew Mullinger, Funding Circle hits a similar sector of the market to Iwoca, promising loans of between £10,000 – £500,000, with decisions typically made within 24 hours.
Funding Circle works on a peer-to-peer model, taking money from a broad pool of investors and routing it to creditworthy businesses.
What you get: Unsecured loans of between £10,000 – £500,000 with rates starting at 1.9% per year.
OakNorth is a UK fintech that specialises in providing loans to medium-sized businesses. It was founded as recently as 2015 by Rishi Khosla and Joel Perlman, who had previously founded Copal Amba, which they later sold to Moody's. OakNorth made headlines when it raised an eye-popping funding round of $440 million (£343 million) from SoftBank's Vision Fund and Clermont Group in February 2019.
OakNorth lends at the upper end of the scale in relation to this list, providing SMEs with business loans of between £500,000 and £40 million. It offers a higher touch service, with a human advisor providing rates and options but is also underpinned by the OakNorth Analytical Intelligence platform, which allows the lender to make lending decisions in weeks not months, while also promising a lower risk of default by spotting warning signs early.
What you get: Loans of between £500,000 and £40 million with access to an online portal and a human advisor.
The government also provides debt finance to small businesses through its Start Up Loans scheme.
What you get: The government-backed scheme allows startups to borrow up to £25,000 at a fixed interest rate of 6% p.a. over a 1-5 year repayment term. The company also provides '12 months of free mentoring'.
Founded in 2012 by Conrad Ford, Funding Options is a UK fintech that aggregates sources of funding for small businesses using open banking data.
Funding Options aggregates and compares more than 70 lenders, from high street banks and challenger banks, to independent lenders and smaller specialists like Iwoca.
Founded in 2013, Growth Street provides flexible working capital to small UK businesses through its GrowthLine product. It runs on a marketplace model, pooling investment from the public and lending that to small UK businesses and it also raised a £10 million venture funding round in June 2019 led by Merian Chrysalis.
Growth Street also leverages accounting software integrations and new open banking APIs to directly plug in to customer's financial data to streamline the product and cut down on the amount of paperwork required to get a loan.
One downside for startups is you have to be operating for at least 15 months to be considered for approval of a GrowthLine credit facility and as the loan is secured against assets, you will need some of those too.
What you get: A flexible, secured credit line of between £25,000 and £2,000,000. You only pay against what you borrowed that month.
Founded in 2012 as a UK subsidiary of the US lender BFS Capital, Boost Capital focuses on lending to small-to-medium sized companies with loans starting at £3,000. The lender has built an auto-decisioning engine which promises funding in days not weeks.
The main downside is Boost only lends to companies that have been trading for three years and have a minimum of £70,000, so it's not the best fit for startups.
What you get: Unsecured loans and merchant cash advances of between £3,000 to £500,000 online or by phone.
There is also the option of crowdfunding some money without having to give up equity.
Here in the UK there is a wide range of crowdfunding options available, from Kickstarter to Indiegogo, and you get to set the terms in exchange for small amounts of funding from members of the public.