Table of Contents
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 strong enough for lenders to be willing to lend you money.
Regardless of why you’re facing difficulties, 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. Non-traditional business loans do, however, tend to have higher interest rates and fees than other lending products.
Key Points
• Alternative business loans are often provided by non-bank lenders and may be open to businesses that cannot qualify for traditional financing, though they typically carry higher interest rates and fees.
• A business line of credit offers flexible access to capital, letting owners draw only what they need and repay just the borrowed amount plus interest.
• Invoice financing and invoice factoring both enable business owners to access capital tied up in unpaid invoices — either by borrowing against them or selling them directly to a lender.
• Merchant cash advances tend to base eligibility on a business’s credit card sales history, potentially making funding accessible even to owners who lack strong personal or business credit scores.
• Alternative business loans can deliver funds faster than traditional bank options, but small business owners should carefully weigh the trade-off of potentially shorter repayment terms and higher interest rates.
What Are Alternative Small Business Loans?
As you might guess from the name, alternative business loans provide alternatives to more traditional small business loans offered through banks. These may include lending products similar to those provided by traditional banks or different products. Qualifications for these non-traditional business loans tend to be less stringent than, say, what’s required for U.S. Small Business Administration loans (called SBA loans) or lines of credit offered through a bank.
Because the requirements are generally less strict, alternative business loan lenders take on more risk when they approve these loans. For that reason, they usually charge higher interest rates.
Recommended: Comparing Small Business Loans and Grants
10 Alternative Business Loan Types
If you don’t qualify for more traditional types of financing, like term business loans, one of these small business loan alternatives might be worth considering.
1. Business Line of Credit
Sometimes you don’t need to receive your money all at once, in a lump sum. Having access to a business line of credit allows you to withdraw what you need when you need it, up to the limit set by your lender. 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 funds against. If you borrow a portion and pay it back, you can usually withdraw funds from the full line of credit amount again, up to the 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. A year 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. With a term loan, you get a lump sum of cash up front and pay it back, with interest, on a predetermined schedule.
A common 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 several months to two years. It’s a good idea to be sure you’ll be able to make the higher payments that a shorter term may require.
Recommended: Minimum Credit Score for a Business Loan
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 their face value. 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 such as heavy machinery, a refrigerator for your restaurant, or computers, you might want to consider an equipment loan.
With these loans, 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 small business loan 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 and/or debit 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 an 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
Online lenders offer various types of business loans, including common term loans and lines of credit.
They typically come with less stringent requirements regarding factors like credit score, annual revenue, and time in business. For example, traditional banks often prefer to see two years in business, but online lenders don’t usually demand that. Typically, applications are simpler; decisions come faster.
The downside: You may pay higher interest rates and be offered shorter repayment periods on online business loans.
7. Short-Term Loans
Speaking of online lenders, you’ll generally find short-term loans online rather than through a traditional bank. In most cases, they must be paid off within three months to 24 months.
To assess applications for short-term business loans, the lender typically looks at daily cash flow, revenues, and time in business rather than evaluating an applicant primarily on personal and business credit scores. 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 could 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. In some cases, you can use one as an alternative for short-term business loans.
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 with a business credit card. Also, note that business credit cards are not legally required to provide all the legal protections that personal credit cards give users.
9. Crowdfunding
There are several types of crowdfunding you can consider as ways to ask a wide range of people for funding through a crowdfunding platform. Money that flows into a business through most crowdfunding (except loan crowdfunding) is not actually a loan, as it’s not debt financing.
Equity crowdfunding falls under the category of equity financing. You are essentially offering shares of your company in exchange for money. You could be pitching to venture capitalists (employees of risk capital companies who invest money in businesses) 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 also include reward-based crowdfunding, when individuals contribute to a brand’s crowdfunding campaign in exchange for a token of appreciation, and donation crowdfunding, in which nothing is expected.
The most popular platforms for crowdfunding for businesses include Indiegogo, 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 and serve as an alternative to short-term business loans.
The SBA sponsors a small business microloan program. SBA-approved lenders offer financing up to $50,000 to qualifying companies.
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 and/or fees.
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 or more traditional funding.
Recommended: Mompreneurs: Generational Wealth and Real-Time Struggles
When to Consider Alternative Financing
Alternative business lending can provide 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 apply for a small 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 business loan lenders 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.
The Takeaway
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’ll pay for them. However, it can take some legwork to find the deals you like best.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What are some alternatives to small business loans?
Small business owners may turn to business lines of credit, business credit cards, microloans, equipment loans, and merchant cash advances if they can’t qualify for a traditional small business loan.
What exactly is an alternative finance company?
Alternative finance companies, such as online lenders, offer business owners forms of finance that are outside the traditional financing system of banks and capital markets.
What are some examples of alternative lending?
Alternative lenders are usually online private companies that offer a range of products, including business lines of credit, invoice financing, and equipment financing.
How do alternative business loan lenders differ from traditional banks?
Alternative business loan lenders tend to be online companies rather than brick-and-mortar establishments. Their products typically involve less stringent eligibility requirements, faster turnarounds, and higher costs for the borrower.
What are the pros and cons of alternative business lending?
In general, pros of alternative business lending can include financing that’s easier to qualify for and funds that small businesses can obtain quickly. Cons typically include short repayment terms and high interest rates and fees.
Photo credit: iStock/Andrii Dodonov
SoFi's marketplace is owned and operated by SoFi Lending Corp.Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
SOSMB-Q226-111