Qualifying for business funding may be challenging, particularly if your business has only been operating for a short amount of time. However, there are many more business loan options available today than a decade ago.
Instead of applying in person at a traditional bank or credit union, you can now consider a range of alternative business lending options that can get you the funding you need with a fully online application process.
Read on to learn how alternative lenders operate and their products’ common pros and cons.
What are alternative lenders?
Small business financing can come in many different forms. Beyond the traditional business loan and business credit card options you already know about, alternative funding options include business loans from online lenders and payment processing companies, crowdsourced business loans, merchant cash advance loans and invoice factoring.
Many reputable alternative lenders use their platforms and technology to get small businesses the financing they need. But business owners should know that these financing options all work differently, and they need to read the fine print before they borrow.
Here’s a rundown of some of the most common alternative business financing options.
Business loans from online lenders
Business loans from online lenders work similarly to business loans from traditional banks and credit unions. Online lenders offer many types of business loans, including the term loans and lines of credit you’ll find at banks. But they also offer some of the loan types listed below, like merchant cash advances and invoice factoring.
You may not have heard of many top online business lenders. They work with businesses rather than consumers and typically do not have physical locations applicants can visit.
Business loans from payment processing companies
Some payment processing companies also offer their own business financing loans to eligible applicants. These options require an account with the payment processor. You’ll repay these loans with a percentage of your daily or weekly sales made using the platform.
For example, PayPal’s small business loans range from $5,000 to $100,000.
Online platforms offer crowdfunded loans funded with small investments from multiple investors. A company called Kiva falls into this category, offering small, zero-interest loans to startups and established small businesses alike.
These loans must be repaid, but other types of crowdfunding do not. You may instead reward investors with merchandise or equity in your company.
Merchant cash advance loans
Merchant cash advances let businesses get an advance on their credit card sales. This type of funding can be advantageous for businesses with regular, ongoing sales they can use as collateral, but business loan rates tend to be on the high side.
With invoice factoring, a business owner sells outstanding invoices to a company. You’ll receive up to 85 percent of the total invoice amount. From there, the invoice factoring company will collect payment from their customers. The lender will send you the remaining amount minus fees.
Alternative business lending pros
If you’re considering one of the small business financing options we outlined above, you should know about all the benefits you could get. Here’s an overview of the alternative business lending pros that can apply with some types of funding.
Flexible eligibility requirements
The first benefit of alternative business financing is obvious. These loan options can make it possible to get the funding you need — even when you cannot get approved for a business loan from a traditional bank.
With many available options, you can check the business financing requirements from each and only apply for funding you’re likely eligible for.
Some options don’t require a personal guarantee
Because some loan options like the merchant cash advance and invoice factoring involve selling a percentage of future profits, they can often be acquired without a personal guarantee.
No personal guarantee means the business owner does not put their personal credit at stake when they receive funding. Business owners worried about defaulting on a traditional loan might find that reassuring.
Easy application process
Many online business financing companies make it easy to apply for funding online and at any time of the day or night. This can be a major benefit if you don’t want to apply for a business loan in person or if you want to compare loan options beyond the bounds of your geographic area.
No restrictions on how you use funding
Many business financing options from alternative lenders don’t require you to submit a comprehensive plan that details how you plan to spend the funds. This means you can get approved for funding and then use your loan funds for whatever purposes suit your business needs best.
Get the money your business needs quickly
Loan funds from banks may take weeks to arrive. Approval for U.S. Small Business Administration loans can take 30 to 90 days, and even then, you still have to wait for disbursement.
By comparison, many online lenders can get you your money within a week. Some even offer funding within 24 hours of applying.
Alternative business lending cons
While the advantages above can make alternative business funding options a good choice, there are some disadvantages you should know about and consider.
Higher costs of borrowing
Where some types of business funding are offered with competitive fixed interest rates, other alternative loan types are both complicated and costly.
As an example, merchant cash advance loans charge something called a “factor rate” instead of an interest rate. A factor rate is represented as a decimal, such as 1.15. To calculate the total cost of borrowing, you multiply the amount borrowed by that decimal. MCAs are known for being expensive compared to traditional loans, and factor rates can make it tricky to compare costs.
Some don’t build business credit
Since loan options like invoice factoring and merchant cash advances use a business’s future income as collateral, the companies offering these options typically do not report payments to the business credit bureaus. Ultimately, this means some types of business funding will not help you build your business credit score.
Shorter loan terms
Many small business loans from alternative lenders are offered in shorter terms. This can lead to higher payments, making it difficult for small businesses to keep up.
Because alternative business funding options are so wide and varied, you’ll need to do plenty of research before you move forward and apply. You’ll need to know when payments are due and the rates you’ll have to pay to get funding. You should also spend time reading lender reviews to ensure you’re working with a trustworthy company.
The bottom line
When you’re funding a small business, there are more options to consider now than ever. You can still get a business loan from a traditional bank or apply for a business credit card, but some alternatives can help you get faster funding or expand your loan options when your personal credit is on shaky ground.