Small business owners shut out by high street banks say they are being pushed into the arms of high-cost online lenders, leaving many trapped in what they describe as a “punishing debt spiral” of opaque fees, aggressive marketing and crippling repayment terms.
When drone technology firm Vantage UAV needed cash for new equipment and staff, co-chief executive Jon Love turned to online lenders after being rejected for both government grants and traditional bank finance.
“As a small business, cash flow is a major headache,” said Love. “Sometimes you have to get a short-term business loan, and they charge a lot — it’s exorbitant.”
Despite trading for nearly a decade and generating £2 million in annual revenue, the company’s bank “just wasn’t interested”. The alternative lenders provided quick access to cash, but at steep cost. Love later refinanced with community development financial institution First Enterprise, saving £13,000 a month in interest.
His experience is mirrored across the UK as firms grapple with the combined fallout of Covid-19, supply chain disruption, rising labour costs and a sluggish economy. Many turned to short-term online loans to plug urgent gaps — only to find themselves burdened with unaffordable repayments.
Rise in small businesses turning to ethical CDFIs for rescue refinancing
CDFIs, which specialise in lending to underserved small businesses, say they are seeing a surge in refinancing requests from firms drowning in high-cost debt.
Theodora Hadjimichael, chief executive of Responsible Finance, said the situation has become increasingly concerning.
“Our big ask is that all banks start referring small businesses to CDFIs so they hear about fair and ethical options sooner,” she said. “Businesses need the right support at the right time.”
The government launched a review of alternative lenders in March, but its findings have yet to be published.
Business owners report opaque terms and aggressive marketing
Several small businesses told The Times they struggled to understand the true cost of borrowing, with some lenders using complex repayment structures that obscure the real APR. Others described relentless marketing.
“You’re desperate, they email, and you go for it,” said Bernadette Charehwa, managing director of Woodleigh Healthcare, which employs people across Surrey and Leicester. She took loans from Iwoca, MaxCap and FlexiPay (Funding Circle), before refinancing and saving £7,000 a month.
Another business owner, David Reynolds, founder of Baillie Reynolds Maintenance in Somerset, turned to Capify and Iwoca after losing a third of a million pounds during the pandemic.
“When the banks weren’t interested, they were the only bar in town — so I drank at it,” he said.
Reynolds said lenders struggled to provide straight answers about the APR on his loan. When he calculated it himself, he found it to be “about 60 per cent”. Of every £15,000 repayment, £9,000 was interest. “The impact on the bottom line was heartbreaking.”
A representative example on Capify’s website shows a £24,000 loan repaid over one year with an effective APR of 67.89 per cent, though the company says this does not represent all products and that its APRs “start in the low 30s”.
Capify founder David Goldin said the lender conducts thorough due diligence, discloses terms clearly and must account for borrowing costs “four to five times higher than banks”, plus substantial customer acquisition costs.
Iwoca and Funding Circle defended their models, emphasising transparency and saying their products are designed to help businesses manage short-term working capital needs. Both have high Trustpilot ratings — 4.8 and 4.6 respectively — and insist they do not exploit struggling firms.
After refinancing with CDFI SWIG Finance, Reynolds saved £14,000 a month and is now targeting 25 per cent year-on-year growth, with a goal of reaching £10 million turnover by 2031.
“I’m drinking in a better club these days,” he said.
As Britain’s high-street banks continue to tighten lending criteria, small firms warn that the growing reliance on online lenders — combined with soaring repayment costs — risks creating a permanent underclass of SMEs trapped in expensive debt.
