Alternative Lending: Best Lenders and Loan Options in 2020

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Alternative Lending: Everything You Need to Know

Despite the prevalence of main street businesses across the U.S., small business owners have traditionally faced difficulties when it comes to accessing financing. Luckily, the alternative lending industry has developed as a solution to this problem.

Whereas small businesses are often turned away by banks and credit unions, alternative lenders offer business loans that are accessible, flexible, and fast to fund.

Wondering if an alternative lending solution is right for your business? We’re here to help.

In this guide, we’ll break down five of the top alternative lenders, the most common types of alternative loans, as well as the possible advantages and disadvantages of alternative vs. traditional bank lending—so you have all the information you need to make the best decision for your business.

The Ultimate Guide to Alternative Lending

What Is Alternative Lending?

In short, alternative lending refers to business loans that are available outside of traditional bank lending.

What is an alternative lender?

Instead of banks or credit unions, alternative lenders are typically online-based, private companies that operate like the lending arm of a bank.

This being said, alternative lenders offer a range of business financing products, including term loans, business lines of credit, invoice financing, equipment financing, and more.

In addition, whereas bank loans are traditionally difficult to qualify for—with strict requirements, extensive application processes, and lengthy-time to funding—alternative lending is characterized by speed, flexibility, and accessibility.

To this point, although alternative lending products typically have higher interest rates than bank- or SBA loans, they have more flexible requirements (credit score, time in business, annual revenue), thereby offering funding to a wider variety of small businesses.

Plus, most alternative business lenders use algorithms to underwrite loan applications quickly, software to scan business financials and sync with accounting files—and allow the entire application process to be completed online.

Therefore, because alternative lenders don’t have the costs associated with running a brick-and-mortar operation (like a bank does) they can focus on offering streamlined processes, as well as investing in small businesses that are normally considered “too risky” for bank loans.

5 Best Alternative Lenders for Small Business

As the popularity of alternative lending has grown, more and more companies have entered the space, leading to a variety of options for small business owners. This being said, however, in comparison to banks, which face strict government regulations, there are generally fewer restrictions on alternative business lenders.

Therefore, you’ll want to be careful and ensure that any lender you consider working with is reputable, reliable, and can offer the best possible financing for your business.

With this in mind, if you’re looking for a place to start, you might look into the following five options, summarized in the chart below:

Top 5 Alternative Business Lenders

Lender Products Offered Interest Rates Qualifications Time to Fund Best for:
Term loan
4.99% to 22.99%
620 credit score; two years in business
As fast as one day, average of five days
Affordable, fast longer-term loans
Line of credit
1.5% to 10% per month
One year in business; $50,000 annual revenue
As fast as the same day, can take up to three days
Fast access to line of credit, especially for businesses with bad credit
Invoice factoring, line of credit, term loan
0.25% to 1.7% per week for invoice factoring; 4.8% to 51% for line of credit or term loan
Varies based on specific financing product
Average of two to seven days
Meeting a variety of financing needs, especially for startups (with less than one year in business)
Term loan, line of credit
9.99% to 99% for term loan; 13.99% to 63% APR for line of credit
600 credit score; one year in business; $100,000 annual revenue
As fast as one day
Fast funding for a short-term loan or line of credit, plus prepayment discount
Invoice financing and line of credit
Starts at 4.66%
500 credit score; three months in business; $25,000 annual revenue
As fast as one day
Quick access to invoice financing or line of credit, especially for startups and businesses with bad credit

Let’s break down these alternative lending options in more detail.

Funding Circle

Funding Circle is an alternative business lender that operates on a peer-to-peer model—meaning the funding for their loans is actually provided by a network of individual and institutional investors.

This being said, Funding Circle can offer loans of up to $500,000 with terms that range from six months to five years. Interest rates on Funding Circle loans range from 4.99% to 22.99%.

Of all of the alternative lending options out there, Funding Circle will be one of the best choices for affordable rates and long terms—similar to a traditional bank loan. Unlike a traditional bank loan, however, Funding Circle will be able to process your business loan application much faster, in as little as one day and an average of five days.

To qualify for a Funding Circle loan, you’ll need at least two years in business and a minimum credit score of 620. Unlike some other alternative lenders, Funding Circle does not have a minimum annual revenue requirement.

Kabbage

Whereas Funding Circle is one of the best alternative lending options for longer-term loans, Kabbage is one of the top options for business lines of credit.

With Kabbage, you can access a credit line of up to $250,000 with terms of six, 12, or 18 months. Interest rates on Kabbage lines of credit range from 1.5% to 10% per month.

In addition, Kabbage offers one of the simplest and fastest application processes of any alternative lender on the market—allowing you to connect your bank account and other online business services to their platform, and using this information to evaluate your eligibility.

With this streamlined process, Kabbage can fund you as fast as the same day you apply. In this way, Kabbage is a great option for financing small projects or managing cash flow.

Moreover, Kabbage is one of the only short-term alternative lenders that offers a monthly payment schedule instead of daily or weekly payments.

This being said, to qualify for a Kabbage line of credit, you’ll need at least one year in business and a minimum annual revenue of $50,000. Kabbage has no minimum credit score requirement, making it a worthwhile alternative lending option for businesses with less than ideal personal credit.

BlueVine

Unlike Funding Circle and Kabbage, BlueVine is an alternative business lender that offers three distinct loan products—invoice factoring, lines of credit, and short-term loans—allowing them to serve the needs of a wide variety of businesses.

On the whole, BlueVine is a great option for fast and easy funding, offering funding in only a few days. However, compared to other alternative lending options, the interest rates on BlueVine products can run high—so you’ll want to keep that in mind when looking into their solutions.

This being said, here’s what BlueVine offers with each of their products:

  • Invoice factoring: Loans up to $5 million with terms of one to 13 weeks. Interest rates range from 0.25% to 1.7% per week.
  • Line of credit: Credit lines up to $250,000 with terms of six or 12 months and interest rates from 4.8% to 51%.
  • Short-term loan: Short-term loans up to $250,000 with terms of six or 12 months and interest rates ranging from 4.8% to 51%.

To qualify for invoice factoring from BlueVine, you’ll need to have a minimum personal credit score of 530, minimum annual revenue of $120,000, and at least three months in business. With this low time in business requirement, BlueVine’s invoice factoring is a great option for startup funding.

For BlueVine’s lines of credit and short-term loans, on the other hand, the qualifications will be a little different. You’ll need to have a minimum credit score of 600, minimum annual revenue of $100,000, and at least six months in business.

Although these products have a higher credit score and time in business requirement, they’re still a worthwhile option for newer businesses, as many bank and alternative lenders alike will ask for at least one or more years in business.

OnDeck

One of the original players in the alternative lending industry, OnDeck is a worthwhile option for short-term loans, as well as lines of credit.

With OnDeck, you can access a short-term business loan up to $500,000 with terms of three to 36 months and interest rates ranging from 9.99% to 99%. Their line of credit, on the other hand, is available up to $100,000 with a 12-month term and APR ranging from 13.99% to 63%.

For both of these financial products, OnDeck requires a minimum credit score of 600, minimum annual revenue of $100,000, and at least one year in business to qualify.

This being said, like the other alternative business lenders we’ve discussed, OnDeck offers a fast and simple application and can fund businesses as fast as one day.

Additionally, OnDeck offers a prepayment discount—25% off your outstanding interest discount—when you pay early. It’s important to note, however, that OnDeck can be expensive, especially if your interest rates fall on the higher end of the spectrum.

Fundbox

Finally, the last option on our list of the best alternative lenders, Fundbox, is particularly noteworthy for startups and businesses with average credit.

Fundbox offers invoice financing, as well as a line of credit, both of which have extremely flexible requirements. To qualify for either of these alternative lending options, you only need a minimum annual revenue of $25,000, a minimum credit score of 500, and at least three months in business.

This being said, for either of these products, you can access amounts of capital up to $100,000 with terms of 12 or 24 weeks and interest rates starting at 4.66%.

Like Kabbage, Fundbox has one of the simplest application processes out there, allowing you to connect your business accounts to the Fundbox platform to evaluate your eligibility. Therefore, Fundbox can offer funding as fast as one day.

Types of Alternative Lending

As you can see, there are a variety of alternative business lenders out there—and with flexible requirements and streamlined applications—each of these lenders makes financing much more accessible to small businesses.

This being said, within these business lenders’ offerings, there are different product types—short-term loans, lines of credit, invoice financing, etc.

Keeping in mind everything we discussed above, let’s explore some of the most common types of alternative lending in more detail:

Term Loans

business term loan is what most people think of when they think of commercial financing. These loans have a set repayment time, a set number of payments, and a fixed or variable interest rate.

The difference between these term loans and traditional bank loans, however—other than the fact that they’re issued by alternative lenders—is that they often have shorter terms and higher interest rates. On the other hand, of course, online term loans are much easier to qualify for.

This being said, short-term loans are most common in alternative lending—meaning term loans with a repayment period of one year or less. Some lenders, however, like Funding Circle, do offer longer options.

Business Lines of Credit

Business lines of credit, like those offered by Kabbage and Fundbox, are typically revolving lines of credit—meaning you can draw funds when you need them, pay them back with interest, and then your loan amount resets back to its original value.

Although banks do offer lines of credit, these products usually have lengthy terms and like bank loans, are difficult to qualify for.

Conversely, lines of credit from alternative lenders have shorter terms and are fairly easy to qualify for. As we mentioned above, these options are often great for newer businesses or businesses with bad credit.

Equipment Loans

Equipment loans, also called equipment financing is an alternative lending option that we did not discuss with our lenders above.

In essence, equipment financing is a type of business loan used specifically for the purpose of purchasing business equipment. Typically, lenders allow you to finance up to 100% of the value of the equipment—and the equipment itself serves as collateral on the loan.

This being said, similar to invoice financing, equipment financing is often fairly easy to qualify for—as lenders will evaluate the value of the equipment to determine your eligibility, much more than traditional requirements like your credit score.

Like many of the alternative lending options we’ve reviewed, equipment financing is available from some banks and credit unions, but online lenders will be able to offer faster processes and more flexible requirements (but usually higher interest rates as well).

Learn about some of the best equipment financing companies here.

Invoice Financing

Unlike some of the other alternative lending products we’ve discussed, invoice financing is not typically offered by traditional bank lenders.

With invoice financing, a lender will advance you capital that’s secured by your unpaid invoices. Lenders will usually offer up to 85% of the value of the invoices, with the remaining 15% (minus fees) paid to you when your customers pay their invoices.

Like equipment financing, invoice financing is fairly easy to qualify for as the invoices themselves serve as collateral on the loan.

Overall, invoice financing is a popular loan option for B2B and service-based businesses who have cash flow impeded by unpaid invoices.

This being said, it’s important to note that there are alternative lenders who offer invoice financing, as well as those who offer invoice factoring. Although these two terms are often used interchangeably, there are differences between them, so you’ll want to ensure that you understand what specifically a lender is offering before opting for this product.

Merchant Cash Advances

Finally, a merchant cash advance is another alternative lending option that is very common in the industry.

With this type of product, a financing company gives you an advance that’s paid back with a percentage of your daily credit card transactions, plus a lender fee. Merchant cash advances are best suited for companies that do a large amount of their business through credit card transactions.

On one hand, this is a useful way to pay back an advance: If you have a slow day, you’ll pay less. But on the other, merchant cash advances are incredibly expensive—and we generally advise that you explore other options before settling on one.

Advantages and Disadvantages of Alternative Lending

So, when it comes down to it, alternative lending has become a huge part of the business financing space—with multiple offering a variety of products to meet the needs of small businesses.

This being said, however, there are still traditional lending sources—big banks, community banks, credit unions, etc.—that also provide options for business funding.

How do you know which route is right for your business?

Let’s explore some of the pros and cons of alternative lending to help you decide.

Advantages of Alternative Lending

Although we’ve reviewed some of the most notable advantages of alternative lending throughout our discussion of different lenders and loan options, let’s list them out clearly here:

    Speed and Ease of Application

    With technology on their side, alternative lenders have created simple and speedy application processes for smartphone and desktop computers alike.

    Applying for a business loan can take just minutes—and what’s more, these applications are much easier than their traditional lending counterparts.

    Plus, banks sometimes require copies of your business’s financials on paper, delivered in person, but an alternative lender only needs the bare minimum—and you can simply hit the upload button to share those documents with them electronically.

    You’ll spend much less time and energy on a loan application with an alternative lender than you will on a bank loan, so if those valuable resources are important to you, this is a major plus on the side of alternative lending.

    Quick Turnaround Time

    Their applications are quick—and so is their funding.

    Banks can take a few weeks, or longer, to get back to you about your financing, but alternative lenders will often send you their decisions in a matter of days—and in some cases, hours. Big banks might have the size and money, but alternative lenders can move fast when they need to.

    So if you need an emergency business loan or funding to take advantage of a business opportunity, or you just want capital in your bank account now instead of in weeks or months, alternative lending is a great option.

    Flexible Underwriting

    Alternative lending doesn’t just provide a fast and easy alternative to working with your bank. It reaches a whole new group of entrepreneurs.

    Many business owners who wouldn’t have qualified for a bank loan at all can access extra capital through alternative lending. With this money, a savvy business owner could invest in a marketing campaign, release a new product, purchase more inventory, hire staff, and more.

    When it comes down to it, alternative lending lets small business owners grow their companies in ways they couldn’t when bank lending was the only choice.

    Diversity of Loans

    When you leave traditional lending behind, you open the doors to completely new kinds of business financing.

    Whether you want to get paid for your outstanding invoices upfront, get a lump sum of cash and pay it back with your daily credit card transactions, order a bundle of business credit cards to help you build your business credit, crowdfund your business idea, or something else, non-bank alternatives can help.

    Plus—alternative lending still offers the basics, like a term loan or line of credit as well.

Disadvantages of Alternative Lending

As you can see, there are many strong advantages to alternative lending. When you compare it to traditional bank lending, however, there are some drawbacks.

To this point, although not every small business will be able to qualify for bank financing, it’s still important to understand what these disadvantages entail.

 

    More Expensive

    As we mentioned, alternative lending tends to be more expensive than traditional bank lending. However, some of the ultimate cost will depend on the products you qualify for and your business’s financials.

    If you’re eligible for an SBA loan, for example, then a bank loan might not be that much more affordable. But if you’re comparing traditional financing with, say, a short-term loan, the price difference will be a big one.

    In general, though, you can expect to pay more with alternative lenders than you would with a bank.

    Shorter Terms and Smaller Amounts

    In addition to having higher rates, financing from alternative business lenders usually—but not always—comes with shorter terms and smaller loan amounts.

    Again, it depends on the kind of loan you qualify for, but many alternative lenders cater to business owners who wouldn’t have been eligible for a bank loan.

    This means the financing they qualify for tends to be smaller, with a shorter repayment period. Business owners then have less time to use that extra capital, and they don’t get as much to spend.

    That said, business owners can “graduate” into better loans by improving their credit scores and building up their businesses, eventually making their way into bigger, more affordable financing.

    More Frequent Repayments

    As a consequence of shorter terms, many loans given by alternative lenders have weekly—or even daily—repayment schedules.

    Bank loans, on the other hand, almost always have monthly repayments. If you’re aiming to pay off a loan on a daily or weekly basis, you’ll need to carefully plan ahead. If you don’t consider your business’s financials, those payments could start eating into your cash flow—and potentially endanger your business.

    For instance, merchant cash advances are especially risky for this reason. Not only is this the most expensive type of alternative lending on the market, but they also get repaid with a percentage of your daily credit card transactions.

    Not all kinds of alternate loans have daily or weekly payment schedules, though. There are some with monthly schedules, too. It all depends on your business’s financials and the kind of loan you decide to use.

The Bottom Line

At the end of the day, there’s a reason that alternative lending has become so popular for small businesses.

Alternative lending is more accessible, flexible, and easy to apply for—and generally, these lenders offer a wider variety of options compared to most traditional lenders.

This being said, however, if you can qualify for a bank loan, this will almost always be the most affordable type of financing.

Therefore, as you look to finance your business, you’ll want to compare and contrast multiple options—whether bank or alternative lending options—to determine what solution can offer the most ideal rates and terms for your needs.

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Vice President and Founding Editor at Fundera

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. She launched the Fundera Ledger in 2014 and has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending. She is a monthly columnist for AllBusiness, and her advice has appeared in the SBA, SCORE, Yahoo, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, StartupNation, and more. Email: meredith@fundera.com.
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