For small business owners, securing financing can feel like running a gauntlet. Traditional bank loans, with their lengthy approval processes and strict credit requirements, can leave many entrepreneurs without the capital they need to grow.
Fortunately, alternative lending has emerged as a flexible and accessible financing option, enabling small businesses to access funds quickly. From peer-to-peer lending to merchant cash advances, alternative lenders bring innovative approaches to business financing that prioritize speed and flexibility over rigid requirements.
In this guide, we’ll explore what you need to know about alternative financing options, so you can make an informed choice that fuels your business’s success.
Alternative lending is a growing sector that addresses the limitations many small businesses face with traditional bank loans. Unlike banks, alternative lenders focus less on credit scores and lengthy histories, allowing newer businesses and those with lower credit ratings to access capital. Instead, they consider factors like cash flow, revenue consistency, and business performance, which provides a more comprehensive picture of a business’s financial health.
Alternative loans offer several key advantages:
Traditional bank loans can be difficult for small businesses to secure due to:
Peer-to-peer (P2P) lending connects borrowers directly with individual lenders through online platforms like LendingClub and Prosper. Instead of relying on traditional financial institutions, P2P loans are often more accessible to small businesses, even those with lower credit scores. These loans tend to offer competitive rates, but it’s important for borrowers to note that, unlike banks, P2P platforms may not have extensive recovery processes for defaulted loans.
A merchant cash advance (MCA) provides a lump sum to businesses in exchange for a percentage of future credit card sales. This option is popular with business-to-consumer (B2C) companies that rely heavily on credit card transactions, as it offers quick capital without stringent credit checks. However, MCAs can be expensive due to higher fees and daily repayments that fluctuate based on sales volume, which can strain cash flow if sales dip.
Crowdfunding involves raising small amounts of money from a large group of people, usually through online platforms like Kickstarter or Indiegogo. It not only serves as a source of capital but also allows businesses to validate their product idea with potential customers before launch. While crowdfunding is an accessible way to raise funds, it comes with risks, such as meeting backer expectations and handling marketing costs, which can reduce the overall funds raised.
Invoice financing, or factoring, allows businesses to sell their outstanding invoices to a third-party factor at a discount in exchange for immediate cash. This method is ideal for B2B companies that deal with long payment terms (e.g., 30, 60, or 90 days) and need better cash flow to cover operating expenses. Many factoring companies do not require high credit scores, focusing instead on the creditworthiness of the business’s customers.
Online lenders like Kabbage and OnDeck provide various loans and lines of credit with a quicker approval process than banks. These loans, which often range from $5,000 to $250,000, have flexible requirements, relying more on business performance than on credit scores alone. This makes them attractive to small businesses needing fast access to capital, though the interest rates can be higher than those for traditional loans.
Microloans, typically under $50,000, are geared towards small businesses needing smaller, immediate funding. These loans usually have short repayment terms (a few months to a year) and minimal requirements, making them accessible to newer businesses. Short-term loans can provide quick funding but often come with higher interest rates due to the shorter repayment period.
One of the main appeals of alternative lending is the speed at which applications are processed and funds are disbursed. Unlike banks, which may take weeks or even months to review applications, alternative lenders use streamlined, technology-driven processes to evaluate risk. Many platforms can approve loans within hours, and disbursements are often completed within a day or two. This quick turnaround is especially helpful for small businesses facing urgent financial needs, such as inventory purchases or emergency repairs.
Alternative lenders tend to prioritize business performance and cash flow over credit scores, making their loans accessible to businesses that might not qualify with traditional banks. Factors such as revenue consistency, customer base stability, and recent financial records carry more weight than credit history alone. This broader approach allows businesses with less-than-perfect credit, or those without extensive credit histories, to still access financing as long as they demonstrate operational health.
Many alternative lenders utilize advanced algorithms and data analysis for underwriting, which allows them to bypass the lengthy manual assessments that traditional lenders use. Applications are typically completed online, with businesses uploading financial documents digitally. This technology not only expedites the process but also improves accuracy and data security, enabling small businesses to apply from anywhere and track their applications in real time.
MCAs provide a lump sum in exchange for a portion of future credit card sales, ideal for retail businesses with consistent sales. Invoice financing, however, lets a business sell outstanding invoices to gain immediate cash, best for B2B companies with long payment terms.
Generally, yes. Alternative loans tend to have higher interest rates or fees due to shorter terms and higher accessibility. However, the convenience and speed often outweigh these costs for businesses needing quick funding.
Yes. Many alternative lenders prioritize cash flow, revenue consistency, or customer base quality over credit scores, making it possible for businesses with lower scores to still qualify, depending on the loan type.
Most alternative lenders offer approvals within hours, and many can fund businesses within 24-72 hours. This quick turnaround is a primary reason businesses choose alternative lenders over traditional banks, which may take weeks or months.
Merchant Cash Advances (MCA) or revenue-based financing are often recommended for seasonal businesses. These options allow repayments to adjust based on revenue, making it easier to manage cash flow during slower periods.
Yes, but caution is advised. Known as “loan stacking,” having multiple loans can lead to repayment challenges and potential cash flow issues. If additional funding is needed, it’s often better to consolidate debt or renegotiate terms with the lender rather than stacking multiple loans.
Many alternative loans, such as merchant cash advances, online business loans, and some P2P loans, don’t require collateral, unlike traditional bank loans. However, terms vary, so it’s essential to confirm with the specific lender.
Research is key. Verify the lender’s credentials, read online reviews, and check for accreditations or industry certifications. Reputable alternative lenders will be transparent about fees, rates, and terms, so avoid lenders that appear vague or reluctant to provide clear information.
Alternative financing has transformed the landscape for small businesses by offering a range of accessible, flexible, and quick funding options. While traditional bank loans remain viable, the speed, adaptability, and inclusivity of alternative lenders make them an essential resource for businesses needing prompt financial support or lacking the credit profile banks typically require.