As more and more American business owners look to grow their companies through business financing, alternative lending continues to increase in popularity.

Of course, simply knowing that alternative lending has become an attractive option does you no good until you better understand what these loans are and how they function.

Together, we’ll gain a more comprehensive understanding of what alternative business funding is, how it differs from traditional banking, the most commons types of alternative funding, and what you’ll need to qualify.

Let’s start with the basics.

What is Alternative Business Funding?

Alternative lending is a term that describes the small business financing options available to business owners through non-bank, private, and online lenders. In addition to being a more inclusive group of lenders, owners are often able to secure the capital they need within a matter of days, if not as soon as the same day.

While banks have traditionally been the primary distributor of funds to businesses looking to invest and improve themselves, this changed in a major way during the recession of 2008. During this time, with credit drying up, many banks and traditional business lenders stopped providing financing to small businesses. While alternative lending had been in existence prior to 2008, the past decade has seen many alternative businesses turning to alternative lenders who are willing to help them.

Accessibility has long been an issue. Qualifying for a bank loan is often a major obstacle for companies, especially small and medium-sized businesses. Alternative lending companies provide affordable working capital financing to small businesses that needed reliable business funding. Thanks to alternative lending, private business lenders are able to work directly with small business owners to secure financing products like lines of credit, invoice financing and a variety of term loans.

What Separates Alternative Business Funding From Traditional Banks?

As we learned in the previous section, alternative lending has grown tremendously over the last decade. In 2012, the alternative lending space gave roughly $1.5 billion to small business owners, according to a study from Medici. By 2013, that number had doubled, with estimates of more than $200 billion in funding expected to be loaned by the year 2025.

To understand what’s driving this growth, let’s take a look at 5 of the most distinct features of alternative lending.

Speed

Since alternative lenders do not need to adhere to the same regulations that traditional banking institutions face, alternative lenders are able to process more applications in less time.

Alternative lenders do have their own supervisory processes, however. Since alternative lenders source their financing from private hedge funds, secured lines of credit and other accredited investors, the governance is executed by both the lender and the funding partner.

These checkpoints expedite the review process, enabling companies to qualify and approve applicants can be as little as a matter of hours. Alternative lenders have more freedom to experiment with advanced technologies and tools that consumers are familiar with in other industries. For example, online applications reduce wait times and paperwork and can automate much of the approval process.

Accessibility

Banks typically lend only to those with pristine credit scores, outstanding annual revenues, and more than a few years in business. As you can imagine, this limits the amount of business owners who can qualify for a traditional bank loan.

While many small businesses cannot meet the requirements of a traditional bank loan, securing funding through an alternative lender is more attainable. With an alternative lender, business owners don’t need to worry whether a credit score that is less than perfect will keep them from getting the capital they need.

Flexibility

Traditional banks are much more interested in making loans of $250,000 or more.  Alternative lenders, on the other hand, are far more innovative and willing to work within your financing needs.

It’s not uncommon for alternative lenders to loan anywhere between $5,000 and $1,000,000 regularly. Regardless of whether you are looking to upgrade equipment or increase your inventory, there’s likely an alternative loan to fit your business.

Affordability

When comparing banks and alternative lenders, the interest rates banks are able to offer are usually lower than what alternative lenders can provide. Banks are able to do this since their underwriting guidelines are strict. Since they’re only lending to applicants with meticulous credentials, they minimize their overall risk, therefore enabling them to reduce their rates.

However, as we shared in the Accessibility section, alternative lenders are more accepting of applicants with less proven track records, lower credit scores, and shorter overall times in business. This, combined with the speed of funding, leads to an increased risk for the lender which is reflected in the interest rates.

Higher-Approval Rating

In the past 5 years, alternative lenders have approved between 61% and 64% of all business applicants. Compare these figures to traditional banks and you’ll see a significant drop-off, with acceptance rates between 13% and 20%.

Now that we know a little more about what an alternative business loan is, let’s take a look at some of the best alternative business loans.

The 7 Different Types of Alternative Business Loans

While there are a number of benefits alternative business loans provide, the right loan type for your business will be one that best matches your unique needs.

Let’s take a look at the most common alternative business loans:

SBA Loans

An SBA loan is a financing program partially guaranteed by the U.S. Small Business Administration in an effort to decrease the risk for lenders who disburse funding to small businesses. This loan is intended for owners who may not meet the qualifications of a traditional bank loan but still have strong credit.

Given their government backing and their wide range of use, SBA loans are highly sought-after products that can be hard to qualify for. Compared to other alternative loans, SBA loans can take weeks, if not months, to process. For the purpose of this example, we’ll take a look at the specifics for the SBA 7(a) loan below.

  • Loan Amount: $5,000 – $5,000,000
  • Loan Term: 5 – 25 years
  • Interest Rate: Starting at 6%
  • Speed of Funding:  Fast as 30 days

Term Loans

Similar to a traditional bank loan, a business term loan provides flexibility and stability with payment terms up to 5 years.

A business term loan is a one-time sum of capital that is paid back in increments over the course of the term. This loan type is typically used for long-term investments including equipment purchases, refinancing debt, and commercial real-estate.

  • Loan Amount: $10,0000 – $2,000,000
  • Loan Term: 1 – 5 Years
  • Interest Rate: Starting at 7%
  • Speed of Funding: As fast as 1 day

Short-Term Loans

A short-term loan provides your company with working capital that is paid back over the course of 18 months or less. The perfect loan for when you need funding within days to capitalize on immediate projects, this funding can be used to support renovations, seasonal preparations or fulfilling large purchase orders.

  • Loan Amount: $3,000 – $500,000
  • Loan Term: 3 – 18 months
  • Interest Rate: Starting at 10%
  • Speed of Funding:  Fast as same day

Merchant Cash Advances

A merchant cash advance (also known as an MCA) allows businesses to borrow against their future earnings for immediate capital. The upfront funding is provided by your lender in exchange for a portion of your credit or debit card sales until the MCA is repaid. This is a great option for businesses looking for fast and easy funding with flexible qualifications.

  • Advance Amount: $3,000 – $500,000
  • Estimated Repayment Term: 3 months – 18 months
  • Factor Rate: Starting at 1.14
  • Speed of Funding:  Fast as same day

Lines of Credit

A business line of credit provides you with access to working capital to use as your company needs. You are able to withdraw the exact amount your business needs and will only pay interest on the funds used.

Having ongoing access to a line of credit is a wise business decision, even if you don’t have an immediate need; we never know when the need for emergency funding will come up. You are never obligated to withdraw the entire credit line amount, though you are certainly able to borrow up to the maximum credit limit.

  • Loan Amount: $5,000 – $500,000
  • Loan Term: 6 months – 3 years
  • Interest Rate: Starting at 8%
  • Speed of Funding:  Fast as 1 day

Equipment Loans

A business equipment loan is a financing product used to purchase equipment for your business. These loans typically don’t require a personal guarantee and allow you to secure an advance of up to 100% of the equipment value. Instead, they are usually secured through the equipment being financed which you can fully own after repaying the loan, plus fees.

  • Loan Amount: Up to 100% of equipment value
  • Loan Term: 1 – 5 years
  • Interest Rate: Starting at 8%
  • Speed of Funding:  Fast as same day

Invoice Financing

Invoice financing is funding provided by a lender to replenish your working capital in exchange for future invoice payments. Also known as accounts receivable financing, invoice financing can provide the instant access your business needs for when you have outstanding invoices or a slow cash flow. If you have capital stuck as an unpaid debt, this funding type allows you to maintain your financial responsibilities without disruption.

  • Advance Amount: Up to 80% of receivables
  • Estimated Repayment Term: 3 months – 18 months
  • Factor Rate: Starting at 1.05
  • Speed of Funding:  Fast as same day

With a greater understanding of the alternative lending options available to small business owners, it’s time to dig into what you need to qualify.

How to Qualify for an Alternative Business Loan

Alternative business loans have different qualifications depending on the type of loan. For example, a short-term loan’s qualifications are flexible, but to be approved for a business line of credit, you will need a credit score in the mid 600’s.

While the expectations differ by loan type, the information lenders want to know about your business as part of the application process stays the same.

No matter which alternative loan you ultimately apply for your business will be evaluated by the following:

  • Time in Business
  • Annual Revenue
  • Credit Score

How to Find the Best Alternative Lender for You

Get to Know Their Products

Just as there are a variety of alternative loans, each lender will have their own product offerings and benefits. To get a sense of how these products stack-up, take any two or more of the lenders you’re considering and compare their qualifications, terms, loan figures, and speed of funding against each other. You will need to decide what you value most but this simple exercise will be quite useful.

Read Their Reviews

In the world of social media, a stranger’s opinion can be just as influential as the recommendation or critique from a friend or a family member. Do your homework on the lender by looking through their Google and Trustpilot reviews. This information will give you an idea of how they work with their clients and if they’re the type of company you’d be comfortable working with.

Trust Your Gut

Ultimately, choosing an alternative loan partner is your decision. You can look at reviews, ratings, and compare products all day long, but ‘feel’ is an intangible that cannot be overlooked. When you identify a quality in a lender that you inherently trust, you have found the best alternative lender for you.

The Final Say on Alternative Loans

The need for working capital occurs in every business, regardless of size. The type of alternative loan that’s right for your business largely depends on what you will use it for.

A business loan is an investment in your company and with proper planning, an alternative business loan can be a valuable tool.

If you need help navigating the wide variety of lenders and loan options, Fast Capital 360 will offer expert loan advice for free. Our knowledgeable Business Advisors can answer any questions you may have about alternative loans and how to best use it to reach your business goals. You can talk to us at (800) 735-1067 or reach our advisors online.

Join 20,000+ businesses & get industry news & insights to your inbox weekly