Alternative business funding refers to various financing types available outside of a traditional bank. In many cases, these options can offer better solutions than a conventional loan can.
However, alternative business funding options are plentiful and can be confusing as they often require more steps than the better-known, straight-forward bank application process. Some examples include:
- Lines of credit
- Business credit cards
- Term loans
- Short-term loans
- SBA loans
- Equipment loans
- Invoice financing
- Merchant cash advances
- Medical practice loans
- Personal loans
It can be hard to decide what’s right for you, especially if you don’t know much about your options. Taking out an alternative business loan from a private lender before you fully understand the terms can put you in even more financial trouble.
Before making any commitments, do your research and gather all the knowledge you can on the pros and cons of each type. Understand how to apply, how the process works, and what the risks are both in the short- and long-term.
Once you have all the necessary knowledge, you’re ready to apply and secure the financing you need to keep your business running. Alternative funding can be a great option for businesses that don’t want to go the traditional route or do not qualify for them.
Small Business Financing and Alternative Lenders
A decade ago, there was a worldwide recession that impacted B2B bank lending and small businesses in a big way. Lending was the lowest it had ever been, and still today, our economy has yet to recover fully. That means that as a small business owner, your chance of borrowing money from a traditional bank isn’t as high as it would have been previously.
That’s where alternative business funding steps in. These lenders fill in the gaps where traditional banks fail. They offer many different types of loans to sole proprietors and small businesses that need funding badly but are unable to get it for any number of reasons. The benefit to you, as a small business owner, is that now you have more options than you ever had before.
However, going into alternative business funding, you need to understand that these options don’t operate like traditional bank funding. They can be an amazing resource if you’re in need, but they’re not without their drawbacks. You can’t approach alternative business funding without first knowing what you’re getting into, and that can take time and research.
The 10 Most Popular Alternative Business Loans
If you’re not sure where to start, here are the ten most popular alternative business loan options on the market. While some of these options may not be right for you depending on your unique situation, this list does at least give you a better idea of what’s out there.
Business Lines of Credit
Having a business line of credit gives you access to cash before you need it. It’s best to apply for this type of financing before the need arises when you’re likely in good financial standing as your current debt and income will affect your approval odds and credit limit. You may not need the money immediately, but it will be there as a safety net should you need it in the future.
In most cases, this funding source does require some pre-emptive action and is harder to obtain in a pinch, but given the expense of emergency funding sources, it is worth a try even if you do need the money now. Many sources outside of traditional banks offer business credit these days, including well-known credit card companies.
In fact, this solution is like a credit card. You’re pre-approved for a specific amount, and you can borrow it as you need it. Then, you only have to repay what you borrowed, with interest, of course. However, unlike a credit card, a line of credit gives you access to cash.
While lines of credit at a traditional bank can be tough to qualify for, alternative lenders make it faster and easier. You may be eligible for a line of credit from an alternative lender if you have more than six months in business and over $50,000 in revenue annually.
Business Credit Cards
Like a business line of credit, having a credit card for your business allows you access to money when you need it. However, you need to find a proper fit for your business, and there are a lot of options.
Most business credit cards will have some form of rewards—things like miles, cash back, and other point systems that reward you for using the card. Even if you don’t require additional funding, business credit cards can be an excellent way to help keep your business and personal finances separate for tax purposes and provide an easy-to-follow paper trail.
Applying for a business credit card before you need it awards you the same benefits as a line of credit. They are easier to qualify for at times when your cash flow is good. Plus, if you can afford to pay off your balance monthly, you can earn cash and rewards for your business by putting your expenses through the credit card.
These are the types of loans you think about when you think of traditional loans. You get a lump sum of money, and then you pay it back over time with interest. It’s pretty simple. Getting a term loan from an alternative lender gives you a lot of money now and allows you to pay it back over 2-5 years in monthly installments.
These can be some of the most affordable options for alternative lending, but they are still more expensive than SBA loans or traditional bank loans. They are also hard to qualify for because not many alternative lenders offer this option. However, the applications are quicker, getting you the money faster.
If you’ve been in business for at least a year, have a credit score of at least 600, and have more than $90,000 in revenue annually, you will most likely qualify.
Much like a term loan, you’ll get a sum of money that you pay back in monthly payments over time. However, with a short-term working capital loan, the repayment term is shorter, and the cost is much higher. You usually only have 3-18 months to pay the loan back, and you’re dealing with factor rates instead of interest rates.
Before you decide on a short-term loan, use a calculator to translate the factor rate into APR, so you know what your rate is. While it may cost more, you’ll get your money much faster. If you’re in a bind, this is the way to go.
You may qualify for a short-term loan if you have been in business for at least one year, have a credit score of at least 550, and have annual revenue of at least $50,000 annually.
Small Business Association (SBA) loans fit into a gray area because traditional banks offer them, but they are still in fact in the alternative lending category. An SBA loan could be available through your local bank if you don’t qualify for the loans your bank offers.
You can get SBA loans in more than one place, and many alternative lenders provide them as well. The SBA 7(a) loan is specifically a working capital loan that is one of the most popular offerings from the SBA.
Check out your options for a working capital loan with bad credit here.
These are long-term loans backed by the government in part. This guarantee makes it easier for lenders to loan money to small businesses because the government mitigates some of the risks. Even if you don’t qualify for a loan from a traditional bank, you may be eligible for an SBA loan. They’re great products and some of the cheapest options.
As you may have already guessed, because the government is involved, SBA loans can take months to process. If you’re not in a hurry, it’s worth it to wait, but if you need cash now, it’s not the best option.
You could qualify for an SBA loan if you have been in business for at least two years, have a credit score of at least 620, and have $100,000 in revenue annually. These are some of the most challenging loans to qualify for, so don’t get discouraged. You have a lot of other options if the SBA doesn’t work out.
The name of this loan type is pretty descriptive. If you need to purchase new equipment, this is the loan type for you. You could qualify for as much as 100 percent of your equipment cost. The drawback is that your new equipment will serve as collateral. If you can’t repay the loan, you’re at risk of losing your brand-new machinery.
You pay these loans back in monthly payments over a predetermined amount of time. These types of loans get you less expensive financing by using equipment as collateral, but they can take a long time to process because your purchases require audits. Plus, if the equipment you intend to buy depreciates quickly, leasing may be a better option.
You can qualify for equipment loans if you have more than 11 months in business, with a credit score of at least 600, and an annual revenue of at least $100,000.
Invoice financing is excellent for businesses who have late paying customers, which can cause slow cash flow. You can get between 50 and 90 percent of your total outstanding invoices from the lender up front. This gives you some operating capital to work with while still following up with your customers for payment.
Once the invoice has been paid to the lender, you receive the remaining percentage minus the fees the lender charges. It’s usually a flat rate percentage to initiate the advance and then an additional percentage per week for as long as the invoice remains outstanding.
You could qualify for this type of financing if your customers are businesses themselves and you have been in business for at least six months with $50,000 in revenue annually.
Merchant Cash Advance
Merchant cash advances can give you cash in hand quickly. They are cash advances that allow you to repay them with a percentage of your credit or debit card sales. It allows for a dynamic repayment plan that accounts for the ebbs and flows of your sales. When sales are low, a smaller amount of money is taken to repay the loan and vice versa.
However, merchant cash advances can be one of the most expensive options when it comes to alternative business funding. You should make sure you evaluate all your options first.
The main benefit with merchant cash advances is that they’re easy to qualify for and you get your money quickly, often within 24 hours. You may qualify for a merchant cash advance if you’ve been in business for at least one year, have a credit score of at least 500, and have $50,000 in annual revenue.
Medical Practice Loans
A medical practice loan can function like a short-term loan, a line of credit, or even a revenue advance. It gives your medical practice the immediate cash you need to acquire sufficient office space, hire more nurses for an expanding practice, pay a vendor, or whatever other expenses might arise.
The medical field comes with inherent risks and responsibilities that can make it hard financially. When you find you are struggling to stay afloat, this could be a great option. The downside to this type of loan is that young doctors and doctors with too much outstanding debt or poor credit scores may not qualify.
You may not immediately think to take out a personal loan to help your business, but it’s an option. This is especially true when owning a business means that your personal finances and credit score are impacted by business decisions as well.
Personal loans are a fantastic option when you don’t qualify for any of the other business loans due to lack of operating history, sales, or any of the other factors that play into getting approved. You only need your personal credit score to qualify, but your credit score needs to be good.
This solution offers fast funding for startups or small businesses with strong personal credit. However, it comes with high costs, risk of damage to your credit score, and smaller borrowing amounts of about $50,000 or less.
Eligibility Requirements for Alternative Business Funding
You have options when it comes to looking for a loan for your small business. You can start at the bank when:
- You have months of runway to finding the right financing for your needs
- You have a minimum of five years in business
- You are already profitable
- You have a fantastic personal credit score of 700 or more
If you don’t meet these criteria, it is probably better that you start with an alternative lender because:
- You need funding in a few days or weeks
- You haven’t been in business for very long
- Your personal credit needs improvement
- Your business isn’t profitable yet
If you meet even one of those criteria, you’re better off looking outside of traditional bank loans and venturing into the world of alternative lending.
Eligibility requirements will vary based on the type of loan and the alternative lender you decide to use. A lot of different factors will influence your eligibility, and the only way to know is to apply. Having a general idea of eligibility will get you started on the path to knowing what the best options may be, but you’ll never truly know unless you take a chance.
Lending Sources for Alternative Business Loans
Chances are, you’ll be working closely with an alternative lender for your business loan. So, where do you start in making sure the lender is the one you want to work with and that they have your best interests in mind?
- Read the lender’s reviews online. The best way to find out about a particular lender is by reading other people’s experiences. You’ll get an idea of what they offer and how they can help or hurt.
- Get to know their products. If they don’t offer the type of alternative loan you want, then you probably shouldn’t go with them. They won’t be able to provide what you need, and that could damage your finances in the long run.
Go with your gut. If you ever get a bad feeling about an alternative lender during any part of the process, walk away. Don’t take money from someone you don’t feel like you can trust. Lending money is a risk for them, but taking their money is a risk for you as well.
Now that you know a little bit more about what to look for, you can start an informed search and decide what the best option is for you. We touched on several different options for you and your business. With the knowledge you now have, you can better identify what you need, what you can qualify for, who you can trust, and when you should take action.