Beyond the Bank: The Changing Face of Business Funding in 2025
Why UK SMEs must explore alternative and innovative funding strategies to fuel their growth
Introduction: A New Era for SME Finance
In 2025, UK business leaders face a funding landscape that looks very different from just five years ago. Traditional bank lending has recovered cautiously following a period of economic volatility, but for many SMEs, the future lies not in a single lender or facility, but in a blend of funding sources that better match the complexity of their needs.
At Pegasus Funding Solutions, we see this shift daily. Alternative finance and innovation driven funding are reshaping the way businesses access capital. For SMEs with ambition, this opens up greater opportunity and flexibility than ever before.
“Many SMEs still default to the idea that funding starts and ends with a bank. But in 2025, the best capital solutions often come from the spaces in between: fintech, high street, blended deals and private debt. The key is knowing how to navigate this evolving ecosystem.”
Richard Olsen, Director, Pegasus Funding Solutions
The Rise of Non-Bank Lending
In 2025, alternative lenders are undeniably filling a gap in the business lending landscape. Many businesses use a mix of bank and non-bank loans, leveraging fintech for a host of needs including invoice finance, short-term project finance, or unsecured loans based on revenue data.
Fintech and Alternative Lenders
Alternative lenders and fintech platforms have stepped into the gap left by tightening credit conditions. From peer-to-peer lending platforms to neo-banks, specialist lenders or digital-only business lenders, these providers offer quick access to capital, streamlined applications and lower collateral demands (though interest rates are typically higher to compensate risk). The alternative lending market in the UK has grown consistently, with a potential market size of over $75 billion by 2028. These lenders often target segments under-served by banks, whether it’s quick working capital loans, merchant cash advances for retailers, or property-backed loans for development projects.
For SMEs, the attraction is speed and flexibility. A merchant needing to restock for a seasonal peak can secure a short-term working capital loan in days rather than weeks/months. A growing consultancy might unlock invoice finance through an app without ever visiting a bank branch.
Yet trust remains a barrier. During 2023–24, as banks tightened credit, many SMEs turned to these fintech finance providers. In 2024, 45% of SMEs said they were hesitant to use alternative lenders, often due to unfamiliarity. Efforts by industry bodies (like the Lending Standards Board) to establish best practices and transparency in this sector are ongoing to build confidence. As transparency improves and industry standards rise, this hesitancy is expected to fade.
Asset-Based Lending and Leasing
Asset-based finance like leasing, stock, commercial mortgages and invoice finance provides tailored growth capital, often tied to specific uses. For instance, manufacturing and construction firms heavily use equipment leasing to expand production capacity without the upfront cost, essentially paying over-time from the new revenue generated. Leasing has been buoyant in recent years, with overall new business up 4% in 2024.
Asset finance is now an essential tool for SMEs in capital-intensive sectors like manufacturing, construction and logistics. Leasing allows businesses to scale without large upfront outlays, while asset-based lending (ABL) uses tangible assets such as stock, equipment, property or receivables, to unlock growth capital, with larger amounts of capital accessible if a business has a strong asset base. For example, a distributor might use an ABL facility to finance a big increase in inventory ahead of a seasonal peak in sales.
Invoice finance (factoring or invoice discounting) similarly grows as the business grows, where more sales mean a larger borrowing base.
The flexibility of these solutions makes them highly attractive. As sales grow, invoice finance lines grow with them. Companies can maintain headroom, giving them the ability to act quickly when opportunities arise. In 2024, many SMEs arranged larger facilities than they initially needed, securing their position for future expansion.
Revenue-Based Finance: Matching Repayments to Performance
Revenue-based finance (RBF) has gained traction with online-first, digital businesses and start-ups. It offers upfront capital in exchange for a share of future revenues. This is an appealing option as repayments flex with revenue: in slow months you pay less, in high-revenue months you pay more and no equity dilution occurs.
While still a niche, RBF has grown as part of the funding mix for digital companies (like e-commerce or SaaS) that can connect their online sales data to the financier. For example, an e-commerce brand launching a new product line could access £100,000 and repay 9% of monthly sales until £130,000 is returned. It’s more expensive than a bank loan on paper, but the alignment with cash flow makes it a compelling option.
UK operators like Outfund and Uncapped now serve a growing share of the UK’s digital SMEs. While still niche, RBF is fast becoming a go-to option for businesses with strong online data and predictable income streams.
Private Debt Funds and Direct Lending
For ambitious mid-sized businesses, private debt funds offer structured, non-bank lending solutions. These are asset managers who raise capital from investors (like pension funds) to lend directly to companies, often in forms like mezzanine debt, unitranche loans (a single combined loan, often at a fixed rate), or structured credit. They often step in when banks cannot meet a company’s full financing needs or when a bespoke solution is needed (for acquisitions, expansions, etc.).
Throughout 2024, private debt funds in Europe saw robust activity. Sifted reported a record €24.4 billion in startup and tech-related debt financing across 293 deals in the first half of 2024. In the UK, this trend translates to more businesses taking on growth loans from non-bank institutions, ranging from venture debt for startups (loans that complement VC funding) to larger credit facilities for corporates.
As an example, a software company pursuing a strategic acquisition might secure a £20 million loan from a private fund more quickly than from multiple traditional banks.
Support from entities like British Business Investments has channelled more capital into this space, enabling SMEs to access funding with more flexible terms and tailored structures.
The Public Route: Capital Markets and IPOs
Capital markets remain a limited option for smaller SMEs, but are occasionally used by mid-sized firms through corporate bond issues or listings on platforms like AIM. While IPO volumes were down in 2022–24, reforms may improve market access in future.
Still, for most SMEs, the public route is either out of reach or not the right fit. The bulk of expansion funding continues to come from private lenders, investors and hybrid funding models.
Funding Is Becoming Blended and Strategic
More than ever, growth-stage businesses are combining funding sources to meet their goals. A manufacturer might refinance existing debt, add an asset finance line and bring in private investment. A tech firm might mix venture capital and revenue-based finance to fund a product launch.
This is not just tactical: it’s strategic. Too much debt can increase risk in a volatile market, while equity funding can dilute ownership. The right blend balances cost, flexibility and control.
“Blended funding is where we see the smartest strategies being built. It allows SMEs to play to their strengths, spread their risk, and avoid over-committing in one direction. This approach takes more planning, but the rewards are significant.”
Richard Olsen, Director, Pegasus Funding Solutions
New Players, New Expectations
International investors are now commonplace in UK funding rounds. In 2024, 68% of UK startup deals had overseas involvement, bringing new expectations and a faster pace of scale. This can be a huge advantage, but only if the business is ready for the level of scrutiny and performance these funders require.
Meanwhile, the terms attached to debt have become tighter. Banks and lenders are applying stronger covenants, such as minimum profit or liquidity thresholds. Navigating these demands requires expert preparation and a robust business case.
What This Means for UK SMEs
For growth-focused SMEs, the opportunity is real but so is the complexity. There is more capital in the market than many realise, but matching the right funding to the right business need is a nuanced process.
Many business owners are not aware of the full menu of funding options now available. That knowledge gap can lead to missed opportunities, unfavourable terms or long-term limitations.
Final Thoughts
2025 is the year to broaden your view of business finance. With the right structure in place, SMEs can access funding that powers growth, preserves equity, and reduces risk.
Get Expert Support
If you’re planning to grow in 2025, Pegasus Funding Solutions can make sure your funding strategy supports you. We work with SMEs to identify the most suitable mix of funding sources, prepare strong funding applications and negotiate terms that support both short-term operations and long-term ambition.
Our team of experts is here to help you explore your funding options and receive tailored advice access the capital you need to unlock your business potential.
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