Alternative Small Business Loan Options

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Susan Guillory

Updated May 20, 2021

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If you’re in search of financing to launch or grow a small business, sometimes you may find you don’t qualify for traditional business loans. That could be because you haven’t been in business long enough or because your credit scores aren’t high enough for lenders to be willing to lend to you.Whatever the reason, alternative small business loans may give you an option for getting the capital you need. These loans are offered by non-bank lenders and may be open to businesses that don’t qualify for more traditional financing. They do, however, tend to have higher interest rates and fees than other lending products.

What Are Alternative Small Business Loans?

As you might guess from the name, alternative small business loans provide alternatives to more traditional financing offered through banks. These may include lending products similar to those provided by traditional banks or different products. Qualifications for these loans tend to be less stringent than, say, what’s required for SBA loans or lines of credit offered through a bank.Because the requirements are less strict, alternative lenders take on more risk when they approve these loans. For that reason, they generally charge higher interest rates.

Sampling of Alternative Small Business Lenders

This table shows what kinds of products, rates, and terms are offered by some alternative small business lenders and loan marketplaces. These entries represent the first five non-advertisement business results from a Google search for the words alternative lenders for small businesses.

Types of Alternative Small Business Loans

If you don’t qualify for more traditional types of financing, like business loans, non-bank lenders offer several alternative lending products that you might consider.

Business Line of Credit

Sometimes you don’t need your money all at once, in a lump sum. Maybe you’re remodeling office space and know that you’ll have some extra expenses now and more down the road, for example. Having access to a line of credit allows you to borrow what you need when you need it. You pay back only what you’ve borrowed, plus the interest on that amount.Many alternative lenders offer lines of credit. If your application is approved, you’ll be told the maximum amount of money that you can draw money against. If you borrow a portion and pay it back, you can borrow from the full line of credit amount again, up to that maximum. For example: let’s say you’re approved for a $10,000 line of credit. You use $5,000 now and pay it back over a few months. Then later, you borrow the full $10,000, which is available because you’ve already paid back what you previously borrowed, plus interest.

Term Loans

If you’re having a cash flow crunch and need capital quickly, a term loan from an alternative lender can often put funds in your account the same day you’re approved.The difference between an alternative term loan and a traditional bank term loan is that the period you have to pay back the former is usually much shorter, sometimes as little as six to 12 months. It’s a good idea to be sure you'll be able to make the higher payments that a shorter term may require.

Invoice Financing and Factoring

If your business sends invoices to clients, you may be able to leverage them as collateral for financing in one of two ways. The first is invoice financing, which allows you to borrow the value of unpaid invoices to get a loan. The lender takes a percentage of the invoice value as a fee. Once you receive payment on the invoices, you pay back the loan.The second is invoice factoring. It’s similar to invoice financing in that you can use your unpaid invoices to get access to capital. But instead of you being responsible for getting the payment from your clients, you essentially sell the invoices to the lender, usually for a percentage of what’s owed. The lender is then responsible for getting your clients to pay the invoices. When they do, you get back the remainder of what the clients owed, minus the lender’s fee.

Equipment Loans

Either traditional or alternative loans may in some cases require you to put up collateral like real estate, a cash deposit, or other assets. If you don’t have qualifying assets like these but need to purchase equipment like heavy machinery, a refrigerator for your restaurant, or computers, you might want to consider an equipment loan.The equipment you’re purchasing acts as the collateral for the loan. That means that if you default on the loan, the lender could take that equipment to cover your debt.While equipment loans can be considered alternative financing, they may still ask applicants to meet certain qualifications, which can include a minimum credit score, a minimum time in business, and/or minimum annual revenue.

Merchant Cash Advances

Another type of alternative funding is the merchant cash advance. If you don’t qualify for any other type of financing, this may be your best bet. Even if you don’t have good credit, you may still be eligible, since merchant cash advance loans are made based on your business’s credit card sales.Unlike other types of loans, merchant cash advances don't require a monthly payment on what you borrow. Instead, a percentage of your daily credit card transactions is deducted until you have paid back the loan in full.Merchant cash advances charge what’s called a factor rate (which is different than interest rate). That fact can make it confusing to understand the true cost of one of these lending products. Here’s how to look at it. If you get an advance of $25,000 with a factor rate of 1.2, you would multiply the two numbers together to get the total cost you’ll pay back, which is $30,000, $5,000 of which is the fee. That means you’re essentially paying 20% on the loan.

Things to Know About Alternative Business Loans

Alternative business loans can be convenient, especially since you generally get your funds faster than you would with other options. But they often have much higher rates than traditional business loan terms.Naturally, rates vary from one type of alternative loan to another, and from one lender to another. To give you a sense of what ranges you may be looking at, here are some examples of what you might pay in interest for some types of alternative small business loans:

Line of credit: 3.3%-4.8%
Term loans: 4.66%-8.99%
Invoice financing: 3%-5%
Invoice factoring: 1%-3%
Equipment loans: 3.5%-7.5%
Merchant cash advance: 18%-24.20%

If the rate you’re offered seems too high, you may want to consider whether you can wait a little longer for the funds. If so, you may be able to work on building your credit or even hold off until your business has been operating long enough to help you qualify for lower rates.

When to Consider Alternative Financing

Alternative business lending serves the particular purpose of providing financing when other avenues aren’t an option or when you can’t afford to wait for slower, more traditional routes. Otherwise, they aren’t necessarily the most ideal lending options. That’s why it’s best to explore other possible financing sources before deciding to pay more for an alternative loan.However, there are some situations in which it could be a good idea to take out one of these lending options. If you have a once-in-a-lifetime opportunity to grow your business, perhaps by purchasing another company or a costly piece of equipment at a great price, the added expense of the alternative loan might be worth it. Or if you need an infusion of cash quickly (to cover payroll or other expenses, for example), and you can’t afford to wait until clients pay you, an alternative small business loan could be a good fit.And finally, if you have a large project or order to fulfill, an alternative loan can get you the capital you need for upfront expenses. Then you may be able to pay back the loan quickly once your client pays you. .

How to Qualify for Alternative Business Loans

When you’re trying to figure out how to get a business loan through an alternative channel, you may find that the process is similar in many ways to what you’d go through with a bank. You’ll generally need to provide information about your company, including how long it’s been in business and its revenues. Alternative finance companies may or may not consider your credit score, depending on the type of loan you’re applying for. If your credit is poor: there are bad credit business loans that look at other factors, such as your daily credit card sales or revenues, rather than your credit.While you’re comparing small business loans and their terms, be sure to note the requirements for each. That way you’ll know which ones you’re most likely to qualify for as well as get the best rates on.

Compare Alternative Loans in One Place

When it comes to alternative lenders, small business owners do have choices about the type of financing they take out and the rates they pay. However, it can take some legwork to find the deals you like best. As an alternative, you can use a tool like Lantern to apply once and see all the offers you qualify for.Apply today and get a wide variety of lending options and rates to choose from.No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.SOLC20090

About the Author

Susan Guillory

Susan Guillory is the president of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.

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