Today, there are more options than ever for SMEs when it comes to securing finance, making comparing business loans more daunting than ever before. Whereas once high street banks were the primary source of funding for businesses, the rise of alternative lenders and fintech providers over the last decade has created a more flexible, tailored range of options for business owners. 

Deciding the right option will depend on your business’s needs, financial position and what you plan to do with the capital. To help you choose, we’ll explore the lending landscape, provide a business loan comparison between high street banks and alternative lenders, and outline key suitability criteria.

Why SMEs Need To Compare Business Loans Before Deciding

The UK business finance sector has shifted significantly in recent years, with new players and different funding routes emerging, amidst the backdrop of ongoing cost-of-living issues and other macroeconomic factors. After the 2008 financial crisis, the UK government took steps to open up access to finance from other sources than the institutions that had been involved in the crash, incentivising non-bank lenders to enter the space.

Difficulties accessing capital from traditional banks are another reason for this trend. According to 2024 data from the British Chambers of Commerce Insights Unit, around half of businesses surveyed felt that securing funding had become more challenging over the past three years.

The main barriers to business finance are the time-consuming nature of bank loan applications and stricter approvals. Many companies needing fast access to capital abandon the process and seek loans from alternative funding providers.

Let’s compare the pros and cons of business loans from high street banks vs. alternative lenders.

High Street Banks: Pros and Cons

High street banks have supported business growth for years and were traditionally the go-to source of capital for companies seeking to cover the costs of big purchases, fuel expansion plans and manage cash flow. However, the fintech revolution has disrupted the business finance landscape while banks’ lending appetite has changed. According to iwoca’s research, 82% of brokers report a reduced appetite from the major banks to fund SMEs.

Benefits of Using High Street Banks for Your Business Loans

The most obvious appeal of high street banks is they’re a known quantity with the resources to advise and support businesses. Plus, longer repayment terms offered mean smaller monthly repayments. 

Here are the key benefits of high street bank loans at a glance:

• Established reputation and embedded customer trust
• Typically, more options for longer repayment terms and lower interest rates
• In-person availability/in-branch services
• Perceived stability and a low-risk option

Drawbacks of Traditional Bank Loans

Difficulties with funding applications are a stumbling block for many small businesses but this is one of several reasons SMEs are veering away from traditional banks when seeking commercial finance. 

Here are typical drawbacks to consider with high street bank loans:

• More stringent criteria for eligibility and approval, with approval rates falling in recent years to hit just 48% in 2023.
• Length of application and approval process timing vary widely from institution to institution
• A preference to lending to larger businesses
• Many banks require collateral, which is tricky for businesses with limited assets

Alternative Lenders: Pros and Cons

Non-bank lenders are accounting for an ever larger share of SME lending, with recent research revealing that challenger banks and alternative lenders made up 59% of the total gross lending in 2023, exceeding the “Big 5” banks for the third consecutive year. Alternative business lenders attract SMEs seeking more flexibility and quick access to capital, and companies without a pristine credit history.  

Many of these are newer businesses with a focus on technology, creating a more efficient, customer-focused lending process, more suited to SMEs actual needs. By streamlining more of the lending and underwriting process, these providers are able to offer a more tailored experience, rather than the broad-brush approach taken by high street banks due to their limited system flexibility. That means you can get funded faster, on better terms and with simpler, more transparent conditions.

Benefits of Exploring Alternative Business Finance Lenders

Small businesses often want fast finance for short-term needs, from funding new equipment and site upgrades to seasonal industry demands. Therefore, lengthy applications and long-term loans with strict repayment terms aren’t suitable. 

Here are the main benefits of business loans from alternative lenders:

• Faster access to funds 
• Streamlined application and approval processes
• Options for businesses without lots of assets or great credit score
• Higher approval rates and credit limits than high street banks, particularly for unsecured loans
• Flexible loan conditions and varied formats, such as invoice financing, merchant cash advances, equipment finance/refinance, etc

Potential Downsides to Consider

There are some disadvantages, depending on the size and complexity of your funding needs. The main downsides to consider are:

• Typically higher interest rates, due to increased risk appetite
• Loans may have shorter terms, meaning higher monthly repayments
• Some lenders may not have established reputations compared to the big banks

Comparing High Street vs. Alternative Loans for SMEs

High street banks still attract many businesses. However, alternative lenders are breaking down barriers to funding access and offering flexibility and different types of finance that don’t require long-term commitments and strict conditions.

Let’s see how high street banks and alternative lenders compare across key factors like interest rates, loan terms and application/approval processes.

Comparing Business Loan Interest Rates

High street banks usually offer lower interest rates compared to alternative lenders, depending on the loan type and length. They can be fixed or variable, and are influenced by the Bank of England’s base rate. However, it’s important to note that interest rates alone don’t tell the whole story on cost of lending – term length, repayment options and fees can also play a large part.

Many alternative lenders charge higher interest rates, particularly for unsecured loans, due to the high risks lenders incur by lowering approval thresholds – but business loan interest rates vary widely across different lenders. 

For example, iwoca’s small business loan representative interest rate is currently just over 3% per month, and our Flexi-Loans start as low as 2%. 

It’s also important to consider the business loan APR (annual percentage rate), which takes into account additional fees (which will vary from bank to bank and lender to lender) and represents the total cost of credit.

Comparing Loan Terms and Conditions

Big banks offer lengthier terms, as they prefer long-term commitments, typically ranging from 1 to 25 years. They can provide secured and unsecured loans, overdrafts, lines of credit, etc, but often require collateral from business applicants. 

Alternative lenders typically offer shorter loan terms, often up to 5 years, with fewer collateral commitments. They also provide secured and unsecured business loans, plus a wide range of financing options.

Term flexibility can affect borrowing costs as much as interest rates. For example, while banks often charge for early loan repayments, alternative lenders typically offer cost-effective early repayment options, bringing down the total cost of borrowing. 

How the Application and Approval Processes Differ

Getting loan approval from a high street lender can be more demanding than an alternative Bank loan applicants will need to provide exhaustive financial records and approval can take weeks, due to robust credit checks and stringent lending criteria.

With alternative lenders, small businesses can enjoy a streamlined application experience that takes just minutes, due to slick online platforms, more lenient credit checks and fewer documentation requirements. Some providers guarantee approval responses within 24 hours.

What Kind Of Loan Is Right For What Business?

When you compare small business loan options, suitability is key. Rather than just looking for the best loan rates, weigh up the pros and cons and judge which option best suits your business type and funding needs.

What Kind of Businesses Suit Loans from High Street Banks?

High street banks are still popular amongst enterprise organisations with large-scale funding requirements. So, if you want to secure long-term agreements, you may want to go the traditional route.

Business loans from big banks suit businesses with the following:

• Large or complex projects involving multiple stakeholders
• Solid credit histories and proven track records/revenue profiles
• Long-term funding needs
• Plenty of business assets and collateral to leverage

Which Companies Are a Better Fit for Alternative Lending Solutions? 

Many small businesses look to alternative lenders due to higher approval rates, faster access to finance and flexible terms. Traditional banks may not be your best option if you want a short-term loan to support one-off purchases, seasonable demands or cash flow needs. 

Business loans from alternative lenders are best suited to the following:

• Online/ecommerce businesses (preferring revenue-based financing)
• Young businesses with smaller-scale funding requirements
• Entrepreneurs looking to achieve fast growth
• Businesses seeking working capital loans to ease cash flow
• Organisations hoping to finance key assets and upgrade equipment

Summary: Choosing the Right Business Loan for Your Company

We’ve outlined the pros and cons of business loans from high street banks and alternative lenders, key considerations and suitability factors. However, deciding how to choose a business loan and which option is right for your organisation depends on your specific requirements, industry factors and the immediacy of your funding needs.

We suggest you carefully scope out your funding goals and requirements and align them with your choice of loan and provider. You’ll also need to do a thorough and realistic assessment of your finances, as this will influence your funding decisions. 

 How iwoca Can Help

If you want fast access to capital, with minimal effort and flexible loan conditions, tailored to your needs, look no further. Iwoca offers dedicated small business loans to fuel growth and give companies flexibility to match their needs.

We’ve helped over 90,000 small businesses since 2012. You can borrow up to £1,000,000 to give your business the injection of capital it needs to grow and thrive.

Here are just a few of the great benefits of using iwoca:

• Apply in minutes and get approved within 24 hours
• Tailor loan terms to your circumstances – borrow funds from 1 day to 2 years
• Transparent interest rates to help you plan your borrowing 
• No fees for early repayments