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Financing is crucial for any business, but getting a traditional bank loan isn’t always easy, especially if you have poor credit or limited cash flow. In fact, 62.5% of small businesses end up turning to alternative lending instead.
If you’re finding it tough to secure funding through a bank, alternative lending might be the answer. By understanding the basics, you can find the right financial solution that fits your business needs.
Getting started – What is alternative lending?
Alternative lending is a great option for small businesses that have trouble securing traditional bank loans. These loans are usually available online, making it easy to apply and get approved with just a few clicks. This convenience, combined with less paperwork, makes alternative lending especially appealing for startups and small businesses looking for quick, flexible financing.
With fewer small businesses opting for traditional bank loans—only 34% applied in 2021—many are turning to options like crowdfunding, peer-to-peer lending, and fintech platforms. These alternatives offer more flexibility, but they often come with slightly higher interest rates than you’d get from a bank.
Types of alternative lenders
Nowadays, there are more options than ever to get a business loan, and many of the alternative lenders can be found with just a few clicks on your laptop or smartphone. Here are the main types of alternative lenders:
Marketplace platforms
Small and medium-sized businesses can rely on marketplace lenders for quick and easy business loan approval. Unlike banks, they don’t lend themselves but leverage a technological platform to connect borrowers directly with banks and investors. They make money from commissions and fees received from both parties.
Numerous online lenders can provide fast, affordable small business loans tailored to the client’s needs. Online lending marketplaces such as Lendio, Fundera, and Nav connect you with multiple lenders, help you choose the one that’s the best fit for your business.
Peer-to-peer lenders
This is a platform that helps small business owners borrow directly from other individuals through online organizations like Peerform and Funding Circle.
Direct private lenders
A direct private lender uses their capital to finance startups and small businesses. These lenders are not affiliated with banks or any financial institution and instead interact directly with borrowers.
Types of alternative financing for small business
So, what’s the first step in finding the right financing options for your business? Ultimately, the alternative funding options vary depending on your business needs and current financial situation. With this in mind, here are the top financing options available for small businesses.
Line-of-credit loans
Managing cash flow is crucial for small businesses, and business line-of-credit loans are a great tool for this. They work like a credit card, letting you draw funds for various needs—whether it’s buying inventory, paying employees, or handling unexpected costs. You only pay interest on the amount you use, and once you repay the balance, you can borrow again. This makes it a flexible and convenient option for businesses that need to navigate cash flow challenges or want a financial safety net.
If your business faces slow seasons or needs extra funds for important expenses, a line-of-credit loan is ideal. It provides the flexibility to cover both planned and unplanned costs without the stress of strict repayment schedules or penalties.
Small Business Administration (SBA) loans
SBA loans are a great option for long-term funding, thanks to the backing of the U.S. Small Business Administration. This guarantee allows lenders to offer more flexible terms and lower interest rates that might not be available otherwise. With amounts ranging from $30,000 to $5 million, SBA loans can help cover a variety of expenses, such as buying equipment, working capital, real estate, or making leasehold improvements.
These loans are ideal for business owners with strong credit who want secure, low-interest financing with longer repayment terms. They provide a solid financial solution for those looking to invest in their business with favorable terms.
Invoice financing
Invoice financing, also known as invoice factoring or receivable financing, helps businesses boost cash flow by advancing funds against unpaid invoices. This method is quick and straightforward, allowing you to access cash without waiting for invoice payments or taking out a traditional loan. Your invoices act as collateral, so you don’t need to provide costly assets like real estate or inventory.
To qualify, you generally need a strong credit rating, reliable customers, monthly sales of $5,000 or more, and a US-based incorporated company with invoice payment terms of 30 days or longer. This financing is especially useful for businesses that face long wait times for payments after delivering products or services.
Business credit cards
Despite often having high interest rates, business credit cards are one of the easiest and quickest ways to access working capital. They’re great for everyday expenses like paying office rent, advertising, or phone bills. Plus, many offer rewards programs, cashback, and sign-up bonuses, with credit limits usually around $50,000 or more. While you don’t need collateral for these cards, some issuers may require a personal guarantee.
Business credit cards are ideal for those who need regular access to cash and appreciate the convenience and flexibility of credit. They stand out as a top option for businesses that value easy, ongoing financial support.
Equipment financing
When it comes to buying equipment, whether for a startup or an established business, securing enough cash can be challenging. Equipment financing helps you acquire everything from computers and office furniture to trucks and heavy machinery, allowing you to invest in the latest tools or upgrade your existing equipment.
This type of financing is perfect for small businesses struggling to get the capital needed for essential purchases, such as leasing a vehicle, acquiring office machinery, or investing in specialized equipment for daily operations.
Term loans
Term loans, also known as installment loans, are a traditional business lending option typically provided by banks or credit unions. You receive a lump sum of money and repay it over a set period—such as six months to five years—with either a fixed or variable interest rate.
Term loans offer flexibility and transparency, making it easy to manage payments electronically without much hassle. Nowadays, online marketplaces can also help you secure term loans for various needs, even if your credit isn’t perfect. These loans are ideal for established small businesses seeking additional funds for significant investments like real estate, vehicles, or equipment.
Microloans
It is another type of alternative financing for small business which is gaining popularity within the small business community. As the name suggests, microloans are low-value loans of less than $50k (typically closer to $5k – $10k), offered reasonable interest rates. As traditional banks are not interested in lending such small amounts of money, a plethora of alternative lenders is leveraging the benefits from the past few years.
It is just a perfect option for businesses that are in the startup phase of their lifecycle and need working capital to successfully move their business ahead.
Merchant cash advances
A Merchant Cash Advance (MCA) isn’t a traditional loan but offers quick access to cash. With an MCA, you receive a lump sum that you repay through a percentage of your daily credit card sales, plus interest. Payments adjust with your sales, making it easier during slow periods.
Funds can be available within a day, ranging from $1,000 to $200,000. While MCAs are convenient for businesses that rely on credit card transactions, like retail stores or restaurants, they can be expensive, so consider other options first.
Crowdfunding
Crowdfunding is a way to raise money for your business by reaching out to a large number of people, including family, friends, customers, and individual investors. It uses the internet and social media to connect with potential backers through platforms that offer debt, rewards, equity, or charity-based funding.
This method has several benefits: it helps you reach thousands of interested investors, market your idea via social media and email, and boosts visibility and trust. It’s especially useful for testing product ideas and gaining market insights, making it a great option for startups, inventors, artists, and charities.
Also read: Exploring Financing Options: 11 Types of Small Business Loans
Final Thought
Running a small business is both challenging and costly, but finding the right funding isn’t impossible. If you’re seeking financial options for your business, consider the alternative financing methods outlined above to move your business forward. Always do your research and be realistic about your repayment ability.
