In today’s evolving economy, UK SMEs face a unique set of challenges from continuing to navigate post-pandemic recovery to scaling quickly in competitive markets.

Small business leaders may still be unsure of where to turn when traditional finance options fall short. This uncertainty highlights the need for different funding approaches that are not only reliable, but also adaptable to the complexities of modern business models.

When it comes to funding a business, many leaders instinctively turn to traditional options like bank loans or overdrafts. These remain important tools, but what happens when your business doesn’t fit the standard lending criteria?

Whether it’s navigating seasonal cashflow, funding a complex acquisition, or backing ambitious growth plans, businesses need funding solutions that fit their needs. That’s where specialist debt solutions come into play, providing flexibility and tailored structures for those outside the one-size-fits-all lending world.

Why alternative funding matters

Every business faces a distinct set of challenges shaped by its sector, size, ambition, and the market in which it operates. Traditional finance products aren’t always designed to handle complexity, nuance, or longer-term needs. In fact, lending to UK SMEs rose by 13 per cent year-on-year in 2024, exceeding £16 billion, yet net lending remained down due to ongoing repayments of pandemic-era debt. This demonstrates that, while debt funding is widely used, where markets remain uncertain, business confidence in utilising debt reflects caution.

By exploring specialist funding options, businesses can unlock greater flexibility, faster access to capital, and funding structures that support strategic goals. These alternative forms of finance give businesses the opportunity to match the right type of funding to the need.

Asset-based lending

For businesses with assets like stock, machinery, property, or receivables, asset-based lending (ABL) can provide an effective route to release that value and turn it into working capital. Once perceived as just a solution for distressed situations, this market has moved very much towards the growth sector with a wide range of ABL funders leveraging the value of existing assets to secure funding. The UK’s asset-based finance market remains strong, with SMEs drawing £21.2 billion from invoice finance and ABL in 2024 – a 4.4 per cent increase on the previous year. Globally, the asset-based lending market has surpassed $662 billion, with projections suggesting growth of over 11 per cent annually between now and 2032.

For businesses experiencing rapid growth, or those dealing with seasonal cashflow fluctuations, unlocking the value of assets can provide liquidity at crucial points. For example, manufacturers often use ABL to invest in additional stock for busy periods, while service-based companies may leverage receivables to fund growth. In either case, the key is turning balance sheet value into working capital that directly supports day-to-day operations and longer-term ambitions.

Venture debt

For high-growth, venture-backed businesses, particularly in sectors like technology, life sciences, and advanced manufacturing, venture debt provides an alternative to raising fresh equity too early. Used alongside venture capital, venture debt allows businesses to extend their cash runway, accelerate research and development, or expand into new markets while retaining ownership. The UK is the most active venture debt market in Europe, accounting for approximately 18 per cent of all venture debt and growth lending deals.

For founders who want to maintain control while continuing to drive growth, venture debt offers a smart, strategic solution. Used wisely, it can bridge the gap between funding rounds and give ambitious businesses the breathing room they need to scale on their own terms.

Direct/challenger lenders

Direct/challenger lenders play a vital role in supporting SMEs and lower mid-market businesses by offering flexible, tailored financing solutions. Unlike traditional banks, they can move quickly and structure deals to suit specific growth needs.

Leveraged funding – typically maximising debt based on the future affordability of interest and repayments – enables businesses to accelerate expansion, invest in new capabilities, or pursue acquisitions without diluting ownership.

This approach can enhance returns on equity while preserving control. For growing companies with stable cashflows, it’s a powerful tool to scale operations efficiently.

However, careful planning and risk management are essential to ensure debt levels remain sustainable as the business evolves.

High street banks

Finding the right contact at a high street bank can unlock lending opportunities that may not be accessible through a longstanding relationship manager alone.

While frontline contacts often focus on standard offerings, specialist bankers – such as those in structured finance or sector-specific teams – may have access to bespoke credit solutions or appetite for more complex deals. These individuals understand niche lending criteria and can advocate internally for exceptions or tailored terms.

Proactively identifying and engaging with the right internal champion can significantly improve funding outcomes, especially for businesses with unique needs or growth ambitions that fall outside conventional lending parameters.

Aligning finance with strategy

Specialist debt is about matching finance to your business strategy. The best funding structures are those that complement your goals. For example, a manufacturer might use ABL to release cash for international expansion. A business could secure leveraged finance to complete a strategic acquisition, while a tech start-up might turn to venture debt to develop a product ahead of their next equity raise.

Each approach represents a strategic use of debt – not just a financial product, but a way to drive growth. By tailoring finance to the specific needs of the business, leaders can seize opportunities that might otherwise remain out of reach.

Funding for the future

With business models becoming increasingly diverse and fast-moving, the funding landscape needs to keep up. Specialist debt solutions offer flexible, tailored options that empower businesses to take on challenges and grow on their own terms. Sometimes, thinking outside the box is exactly what’s needed to move forward.

Whether you’re scaling fast or managing complexity, now is the time to challenge assumptions about funding. Seek advice, explore your options and don’t let traditional structures limit your potential.

Key takeaways

• Traditional financing options might not be suitable for certain businesses.
• Specialist funding options could offer greater flexibility, faster access to capital, and funding structures that support business’ strategic goals.
• Asset-based lending could work for businesses with assets like stock, machinery, property or receivables.
• Venture debt more suitable for high-growth, venture-backed businesses.
• Direct/challenger lenders play a vital role in supporting SMEs and lower mid-market businesses by offering flexible, tailored financing solutions.
• Finding the right contact at a high street bank can unlock lending opportunities.
• Specialist debt is about matching finance to your business strategy.

Gavin Harrison is a partner in the debt advisory team at Dow Schofield Watts.

Partner-authored articles represent individual perspectives and are not necessarily reflective of views shared by DSW Capital or the collection of businesses that comprise the DSW Network. Opinions expressed are specific to the Partner’s registered business and do not reflect the overall stance of DSW Capital.

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