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Guide to Alternative Small Business Loan Options

Alternative Small Business Loan Options
Susan Guillory
Susan GuilloryUpdated June 8, 2023
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If you’re in search of financing to launch or grow a small business, you may find that in some situations 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.

10 Alternative Business Loan Types

If you don’t qualify for more traditional types of financing, like term business loans, alternative business funding offers nearly a dozen products that you might consider.

1. 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.

2. 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 6 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. 

3. 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.

4. 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.

5. 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 could 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 from 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. 

6. Online Loans

These loans are not so much a different form of financing as a different medium of contact and delivery: all over the Internet. Online lenders offer various types of business loans, including the common term loans and lines of credit. How is this an alternative then? Online loans typically come with less stringent requirements regarding credit score, annual revenue, and time in business. Traditional banks prefer to see two years in business. Online lenders don’t demand that. Applications are simpler; decisions come faster.The downside: You may pay higher interest rates and be offered shorter repayment periods.

7. Short-Term Loans

Speaking of online lenders, short-term loans come online, rather than through a traditional bank. In most cases, they must be paid off within six months to a year — at most, 18 months. Short-term loans are a form of personal loan. The lender looks at daily cash flow rather than evaluating an applicant primarily on credit score and length of time in business. You could get funded in one or two days. However, here, too, you are usually looking at a higher total loan cost. Rates and fees vary, but the APR is typically higher for short-term business loans than long-term loans. Be prepared for repayments that will be due far more frequently than monthly.

8. Business Credit Cards

A business credit card is a credit card for business rather than personal use. Business credit cards can pay for business expenses like travel and supplies without the owner having to get a loan. They can fund large or small-ticket items while earning rewards. Be prepared for expensive annual fees and high APRs. Also, note that business credit cards are not legally required to provide all the legal protections that personal credit cards give users. Recommended: Best Small Business Credit Cards

9. Crowdfunding

Money that flows into a business through crowdfunding is not actually a loan, as it’s not debt financing. Crowdfunding falls under the category of equity financing. You are offering shares of your company to family, friends, and acquaintances in your networks in exchange for money. You could be pitching to venture capitalists (employees of risk capital companies who invest money in companies) or angel investors (individuals who offer their own money in exchange for a piece of the business).Or you may not have to produce shares at all. The several types of business crowdfunding include reward-based crowdfunding, when individuals contribute to a brand’s crowdfunding campaign in exchange for a token of appreciation, and donation crowdfunding, when nothing is ever expected.The most popular platforms for crowdfunding for businesses include Indiegogo, SeedInvest Technology, Kickstarter, Fundable, and StartEngine.

10. Microloans

Microloans for business resemble traditional bank loans–but they’re for smaller amounts. Few of them exceed $50,000. They can help business owners who have applications that haven’t been approved by traditional banks.The SBA sponsors a small business microloan program. SBA-approved lenders offer financing up to $50,000 to qualifying companies.Recommended: The Essentials on Financing and Building Credit

Things to Know About Alternative Business Loans

As spelled out in the 10 options above, alternative business loans can be convenient, especially since you generally get your funds faster than you would with traditional choices. But the alternatives often have much higher rates.Naturally, rates vary from one type of alternative loan to another, and from one lender to another. 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. Recommended: What Are Common Small Business Terms?

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 business 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 score is poor, there are poor 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. 

Explore Small Business Lending Options

When it comes to business loan alternatives, 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 an offer you could qualify for.

Frequently Asked Questions

What are some alternatives to small business loans?
What exactly is an alternative finance company?
What are some examples of alternative lending?

About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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