Alternative business funding generally refers to capital from alternative lenders, sometimes called “online lenders” or “non-bank” lenders. In reality, however, alternative financing for small businesses is so much more than this zoomed-out definition.
Although there are many non-bank lenders out there, the alternative funding industry gets particularly confusing because of all the different types of business loans these lenders can offer.
Luckily we’re here to help.
In this guide, we’ll explain the mains forms of alternative business funding, as well as how to qualify and apply for these solutions.
Historically, small businesses have had trouble accessing bank financing—and during the recession, bank lending to these businesses reached an all-time low.
The good news is, however, due to the decline in bank lending to small businesses, alternative, non-bank lenders stepped in to the fill the void, meaning there are more alternative funding options than ever before.
Therefore, if you’re a business owner who has tried to go to the bank for funding and hasn’t had much luck, you might be considering alternative lending—and rightfully so.
With this in mind, let’s take a look at the most common types of alternative financing for small businesses—this way, you can understand what’s available to you and what might be right for your business.
Term loans are your tried-and-true business loans, and what you’re probably thinking of when you think of a loan. With a term loan, a lender gives you a set sum of money that you pay back, with interest, over a set period of time.
This being said, of all the alternative business funding options, business term loans are perhaps the most similar to bank loans.
Unlike bank loans, however, alternative term loans are offered through online lenders. These term loans, sometimes referred to as medium-term loans, are usually paid back in two to five years with monthly payments.
Although term loans are some of the more affordable alternative financing options, they are more expensive than bank or SBA loans. The pros are that these products have quicker applications and are faster to fund, but the cons are that they can also be fairly difficult to qualify for and there aren’t many lenders offering this product.
Every business owner should have a business line of credit, whether or not they need financing right now.
Lines of credit are a great go-to in case of a cash flow emergency. Since fast cash can be expensive, having a business line of credit in place could save you money in the end.
Lines of credit are similar to credit cards in that the lender extends you a certain amount of credit, and you pull out only what you need. After, you only pay back (with interest) what you use. Unlike credit cards, though, you get access to cash.
Lines of credit were previously quite hard to qualify for at a traditional bank, but alternative business funding sources have made them easier and quicker to apply for online.
If you are looking for financing to purchase a new piece of equipment for your business, equipment financing could be a great option.
With an equipment loan, a lender will advance up to 100% of the value of the equipment you are purchasing. The equipment then serves as collateral for the loan, and you pay back the loan just as you would a normal term loan.
An advantage of this type of alternative business funding is that using the equipment as collateral could help you qualify for cheaper financing, whereas the drawbacks are that financing can take longer to receive as lenders have to audit the purchase and, if the equipment depreciates, you may be better off leasing.
Invoice financing is an excellent option for those who have slow cash flow and late-paying customers.
With invoice financing, lenders will advance you an amount equivalent to around 50-90% of your outstanding invoice.
Once your customer pays the invoice (which pays the lender), you’ll receive the remaining percent, minus whatever fees owed to the lender. These lenders generally charge a flat percent for the advance, and then another percent per week outstanding.
Plus, similar to equipment financing, because the invoice serves as collateral on the loan, invoice financing can be a fast and easy type of alternative financing for small businesses to qualify for.
Short-term loans operate like term loans—in that you are given a lump sum of money that you pay back, at a cost, over time.
The difference is that repayment terms are much shorter, usually three to 18 months in length, and the cost is much higher (often APRs in the double-digits).
Therefore, whereas some medium-term loans are akin to bank loans, short-term business loans from online lenders are very different.
To this point, short-term loan providers often quote their pricing as a “factor rate,” which is not the same as an interest rate. If you receive a short-term loan offer with interest quoted as a factor rate, you’ll want to translate that rate to an APR in order to figure out the true cost of the loan.
This being said, short-term loans are good for businesses that need money very quickly (these can fund in days) but they can be expensive. If you don’t need funding within days, you’ll likely want to see if you can find a more affordable option before taking on a short-term loan.
Merchant cash advances (MCAs) are often the first product people think of when they think of alternative business funding but, frankly, it should be the last. Although this was one of the first alternative financing products available for small businesses, merchant cash advances are absolutely the most expensive on the market.
MCAs are essentially a cash advance that you pay back with a set percent of your daily credit card sales. The pros are that payments ebb and flow based on your sales and they’re easy to qualify for, but the cons are that the APR on these products can reach triple digits, plus with constant payments, MCAs significantly impede your cash flow.
Therefore, even though this type of financing can be the right option for some businesses, you’ll want to consider all other possibilities before taking on a merchant cash advance.
Although most business credit cards are issued by banks (as opposed to online lenders), these products are a form of alternative business funding in that they’re not typically what you think of when it comes to business loans.
This being said, just like a line of credit, a business credit card is something that every business owner needs. A business credit card may not be able to finance your entire business, but it can help with everyday expenses, as well as allow you to build business credit.
Plus, with many business credit cards, you can earn as you spend—receiving cash back, rewards points, or even travel miles.
Therefore, in addition to your other financing avenues, you’ll want to ensure you have a solid business credit card that works for your financial needs.
Like business credit cards, crowdfunding doesn’t necessarily come from an alternative, online lender—however, since it also does not come from a bank or credit union, it’s worth discussing as a form of alternative business funding.
With crowdfunding, you finance your business using contributions from a variety of different individuals, investors, or businesses. There are a variety of platforms, like IndieGoGo and Kickstarter, that allow you to start crowdfunding quickly and easily.
Overall, crowdfunding can be a difficult type of financing, as it requires a lot of effort to create, monitor, and successfully market your campaign. This being said, however, for startups or businesses that can’t qualify for other types of funding, it’s certainly worth considering.
Plus, again like business credit cards, crowdfunding can be a great avenue to supplement or build on other forms of financing.
Finally, you might consider equity financing as a form of alternative business funding. Similar to crowdfunding, equity financing doesn’t come from online lenders, nor is it a viable option for every business.
This being said, however, for certain startups or businesses with high growth potential, it may be an option to consider.
Unlike debt financing, equity financing involves raising funds by selling shares of the business. You might sell shares of the business to angel investors, venture capital firms, or even friends and family. In fact, in some cases, crowdfunding can serve as a form of equity financing.
Of course, there are drawbacks to this type of alternative financing—namely that it’s hard to access for most small businesses and you have to be willing to relinquish some of the control over your business.
On the other hand, however, for businesses that can find angel investors or access equity financing in some way, this can be an extremely affordable and desirable option.
You could be a possible candidate for equity financing if you are:
Now that we have a better sense of the alternative business funding options that are available, let’s discuss how you can determine if this type of financing is right for you.
Generally, bank loans (as well as SBA loans) will offer the most affordable rates, longest terms, and largest loan amounts—however, these products will also have the strictest qualification requirements.
Therefore, you can consult the following guidelines when trying to decide where to start your funding search:
You should start your search at the bank if:
Of course, meeting these requirements doesn’t guarantee that you’ll get a bank loan, but it does mean you’re a good candidate for one.
You should start with alternative lenders if:
It doesn’t need to be for all of the above reasons, but at least one of the above probably means you’re a better candidate for alternative business funding.
Ultimately, if you think you’re a better candidate for alternative business funding, it’s important to note that the specific qualifications you’ll need to meet will vary based on the type of product, as well as the lender you’re working with.
In general, if you have strong personal credit, solid business financials, and at least one year in business, you should be able to qualify for some of the top alternative business loans.
Additionally, it’s worth mentioning that even if you don’t meet all of these business loan requirements, you can still be eligible for different types of alternative business funding. For instance, if only your credit score is holding you back, you might look for options like invoice financing or equipment financing that are backed by inherent collateral, making it easier for you to qualify with average credit.
To this point, even if you do meet all of these general requirements, some types of alternative funding will be better for certain businesses than others. As an example, invoice financing is a great option for B2B or service-based businesses, but will not be ideal for product-based businesses.
So far, we’ve reviewed the most common types of alternative financing for small businesses, as well as the qualifications that you can use to determine whether or not this funding route is right for you.
At this point, therefore, you’re likely wondering about the details regarding where you can get alternative business funding.
Generally, if you’re interested in debt financing—as opposed to crowdfunding or equity financing—there are two avenues you can take to find and apply for this type of funding:
When you go to search for your alternative small business funding online, you might get overwhelmed by your options. Remember—many lenders will say they offer loans, but this can include a variety of different types of products, as we discussed above.
This being said, you may have heard horror stories of businesses who have worked with less-than-legitimate lenders or thought they were applying with a lender and instead found out they were working with a business loan broker.
Now, don’t get us wrong, not all brokers are bad: many do have your best interests in mind and want to get you a loan with the most affordable rates. But, at the same time, many brokers will shop your information only with the lenders who pay them the most. So, if you do decide to work with a broker, you’ll want to be sure to ask the following questions.
A good broker should only make money if you successfully find a loan and the lender should pay them, not you.
Therefore, you’ll want to clarify how the fee the lender pays them affects the cost of your loan.
Sometimes your loan could be more expensive because the broker’s fee is attached to the cost of the loan.
You can take the list the broker provides and search the lenders on Trustpilot.com or another review site.
Using these resources, you should get an immediate sense of whether or not their network of lenders is legitimate.
If the broker is good and reliable, they should be able to get you a list of customers who recommend them quickly.
In most cases, however, you’ll probably be working directly with a small business lender.
When you find yourself searching “small business loans” and trying to decide which lender might be right for you, you can follow a similar path and do the following:
Read the lenders’ reviews on TrustPilot or other trustworthy review sites.
Overall, TrustPilot is one of the best review sites out there and all of the major alternative business lenders are listed on their site.
You’ll get a sense of a lender’s products and customer experience by reading the reviews in length.
You’ll want to figure out what types of products a lender offers and do a comparison of cost and eligibility requirements between them and other lenders.
Ultimately, you’ll want to trust your instincts.
If a lender doesn’t feel legitimate, for example, if they’re offering rates and terms that seem “too good to be true,” there’s no reason to take the risk.
You should walk away immediately and continue your search elsewhere.
At the end of the day, alternative business funding is one of the most common avenues small businesses take to access the financing they need to grow and build their operations.
As we’ve discussed, there are a variety of products available on the market from many different lenders, so your next step is to start your search.
To this point, you’ll want to remember that the best loan and lender for your business will be the one with the most affordable rates and ideal terms. Therefore, you’ll want to ensure that you compare all of your business financing options before deciding what’s right for you.