Alternative business loans offers fast financing to businesses that struggle to qualify for a bank loan — and are usually through an online lender. In early 2020, online lenders approved 81% of applications, according to the Federal Reserve. Big banks approved only 69% of loan applicants.
But alternatives to traditional lenders can come with costs that top 100% APR and often require daily repayments. Online business lending also isn't as heavily regulated as banks. Weigh the risks and consider other business financing options before you apply for an alternative business loan.
Alternative lending is a nonbank business financing option
Alternative lending refers to any kind of financing that's outside of a traditional bank. Generally, these are designed to support small businesses that are too small or too new to qualify for a bank loan. The main highlights include:
- Alternative lenders are usually financial technology companies — otherwise known as fintechs or online lenders.
- Fintechs typically use an algorithm to underwrite your application. Many connect to your business accounts to reduce the need for documents and paperwork.
- It often only takes a few minutes to apply. And next-day or even same-day funding is often available.
- Most alternative lenders require a fair credit score of around 600, at least six months in business and at least $100,000 in annual revenue. There are also options for small business owners with bad credit.
- Many online alternative business loans are highly expensive. Rates and fees are often equivalent to 100% APR — sometimes higher.
- Community lenders and microloan providers are other types of alternative lenders, which offer low-cost business financing combined with training. But these aren't as fast as online lenders.
9 types of alternative business loans
There are several different types of alternative business loans that serve different financing needs. Some options only offer financing once, while other offer ongoing access to funds. Here's how they work.
- Short-term loans
- Lines of credit
- Equipment loans
- Inventory financing
- Invoice financing and factoring
- Merchant cash advances
- Microloans
- CDFI loans
Short-term loans
Short-term business loans are small installment loans with short repayments terms — usually around three to 18 months. These are intended to cover small, one-time expenses and working capital.
- Loan amounts range from $2,000 to $500,000.
- Most require automatic repayments every day or week.
- Many short-term loans come with a one-time fee instead of interest, usually from 10% to 300% of the loan amount.
- Others lenders charge interest and an origination fee that start at around 10% APR.
- Some short-term loans are unsecured. But in most cases, short-term lenders require a lien on business assets and personal guarantee from the owners.
OnDeck short-term loans
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OnDeck is an online lender that offers fast short-term loans to small businesses that have struggled to qualify for a traditional term loan. With same-day funding available, it can be a particularly good choice for emergency expenses. And if you find yourself in need of financing again, returning customers can qualify for reduced or waived fees. But it's an expensive option — and it more than tripled its starting rates during the COVID-19 pandemic. Also, some high-risk industries like car dealerships and auction houses can't qualify.
| Loan amount | $5,000 – $250,000 |
|---|---|
| APR | As low as 35% |
| Min. Credit Score | 600 |
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Lines of credit
A line of credit offers your business access to cash as needed for working capital or ongoing projects. It's a lot like a credit card — but with higher credit limits.
- Credit limits usually range from $5,000 to $250,000.
- Most alternative lines of credit are revolving, which means your credit limit replenishes as you pay back a withdrawal.
- In most cases, each withdrawal on your line of credit comes turns into a short-term loan with weekly or daily repayments.
- Some lenders charge interest and a fee each on each withdrawal. Others charge a fixed fee per week you take to repay. Rates and fees are often similar to a short-term loan
- Most require a lien on business assets and a personal guarantee. But some alternative lenders offer unsecured lines of credit.
Fundbox lines of credit
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Fundbox offers online lines of credit to small businesses that specializes in working capital for business-facing businesses — though all types of companies can apply. It's one of the few business lenders that doesn't require any paperwork. And it only requires six months in business and fair credit. Starting at 4.66% per week its financing fee works out to an APR of around 35% — on the high end, even compared to other online lenders. Fundbox also charges most of this fee during the first half of the loan, making it difficult to save with early repayment
| Loan amount | $1,000 – $150,000 |
|---|---|
| APR | Not stated |
| Min. Credit Score | 600 |
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Equipment loans
Some alternative lenders also offer equipment financing, or a term loan that uses your equipment as collateral.
- Most alternative equipment loans require a down payment. Typically you can receive between 80% and 100% of the equipment's cost from an equipment loan provider.
- Loan terms range from five to 10 years and are based on how long your lender thinks you can use the equipment.
- Equipment loans tend to have lower rates and fewer fees than short-term loans, since they're backed by a specific piece of collateral.
- Lenders approved 87% of equipment loan applications in 2020, according to the Federal Reserve. That was the highest approval rate by loan type of the year.
National Funding business loans
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National Funding is an online lender that offers short-term working capital loans and equipment financing. It offers low rates of and has minimal requirements — six months in business and a credit score of 620 or higher for equipment loans. And for equipment loans, terms start at five years. If you can't qualify for a loan with National Funding, it can connect you with a partner lender — which offers different rates and fees.
| Loan amount | $5,000 – $500,000 |
|---|---|
| APR | 4% to 8% |
| Min. Credit Score | 500 |
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Inventory financing
While you can use most business loans to buy goods to sell, inventory financing is a short-term loan that uses the inventory you purchase as collateral. This can be particularly useful if you suppliers offer volume discounts.
- Like an equipment loan, lenders often finance between 80% and 100% of the inventory's wholesale price.
- Lenders that specialize in inventory financing can send funds directly to your suppliers. But these may require you to work with specific suppliers to qualify.
- Terms are often shorter than a short-term loan — in some cases, they're as brief as two weeks.
- Many inventory financing providers charge a fixed fee instead of interest. These, combined with the short terms, can result in APRs over 100%.
- Most alternative inventory financing providers specialize in e-commerce businesses, though that's not always the case.
Kickfurther inventory financing
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Kickfurther is an online inventory financing platform that allows businesses to crowdfund from its community of buyers. It's one of the few providers that allows you to finance inventory before it's manufactured and offers terms based on your sales period. But costs range from around 1% to 2% per month, which can be expensive if your inventory has a long turnaround. And using this platform can be complicated for people who aren't familiar with crowdfunding.
| Loan amount | Up to $2 million |
|---|---|
| APR | Not applicable |
| Min. Credit Score | 600 |
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Invoice financing and factoring
Invoice financing and factoring offer an advance on your business's unpaid invoices from other companies and government contracts. Both are types of asset-based financing based on your accounts receivables.
- Invoice financing is an advance on your business's unpaid invoices, usually available up to $20,000. You repay the advance plus a fee as your customers fill their invoices.
- Invoice factoring involves selling your invoices at a discount to a third party. These usually start at around $20,000. In most cases, you receive 80% to 95% upfront and the rest after your clients pay — minus the fee.
- Fees typically range from 1% to 3% per month your clients take to fill their invoices.
- Many factoring companies require you to sign up for a contract for at least six months.
- Invoice financing and factoring companies consider your client's credit history rather than your own. But factoring companies may have minimum invoice volume requirements.
FundThrough Invoice Factoring and Financing
FundThrough is an alternative invoice financing and factoring company. It offers invoice financing up to $15,000 and factoring from $15,000 to $10,000,000. Financing comes with a monthly cost of around 2.5% to 5%, while financing comes with a weekly fee of around 0.5%. These prices may be on the higher end for factoring. But unlike most factoring companies, FundThrough can process your application and transfer funds within a day. And instead of submitting paperwork, you can connect your bank account and accounting software, if it's compatible.
| Loan amount | $500 – $10,000,000 |
|---|---|
| APR | Not applicable |
Merchant cash advances
A merchant cash advance (MCA) is an advance on your business's future sales, typically based on credit card sales, debit card sales or bank deposits.
- Usually you can receive an advance of around three times your average monthly sales.
- Merchant cash advances come with a fixed fee instead of interest, represented by a factor rate or cents on the dollar. Factor rates usually range from 1.1 to 3 — or $1.10 to $3 per dollar you borrow.
- Businesses repay the advance with a percentage of your daily sales, which can range from 10% to 30%.
- MCA companies typically accept bad credit and applicants with as little as as three to six months in business.
- Usually you must meet a minimum credit and debit card sales volume of $10,000 to $15,000 per month. Some also consider other bank account deposits.
Merchant cash advances have high approval rates — and high fees
MCAs regularly have some of the highest approval rates compared to other alternative business loans, according to the Federal Reserve. But this alternative business financing option is one of the most expensive out there.
A 2020 Federal Trade Commission report warns that "businesses desperate for funding often seek out MCAs in the short term because they are quick and easy to obtain, but then suffer negative long-term consequences." These consequences include having to take out multiple, high-cost merchant cash advances at once to avoid default.
The FTC has also found that MCA companies can engage in predatory lending practices. Since regulators don't protect small businesses against predatory lenders as much as individuals, make sure you're working with a company you trust. Look for a provider that's upfront about the cost and gets good customer reviews before you apply.
Credibly business loans
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Credibly is an online lender that offers merchant cash advances among other business financing products. It's unusually transparent about fees, requirements and other details compared to other merchant cash advance providers. Factor rates start at a low 1.15 — though like most alternative lenders, it doesn't disclose the maximum factor rate. It may also require more paperwork than other alternative business financing options. But you can still receive funds as soon as the day you apply.
| Loan amount | $5,000 – $400,000 |
|---|---|
| APR | Not applicable |
| Min. Credit Score | 500 |
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Microloans
Microloans are small-dollar loans designed for startups and new small businesses. They may be the most affordable alternative to traditional small business loans and are designed to help your business eventually qualify for traditional bank loans in the future.
- Microloans typically range from $50 to $50,000 with terms as long as five years.
- Most lenders charge lower interest rates and fees than most alternative business loans. Rates rarely top 30% APR.
- Many microlenders have flexible credit and time in business requirements. Some don't require any time in business and accept poor or no credit.
- These are usually available through mission-driven nonprofit lenders and require small business owners to sign up for training courses during the repayment term.
- Some nonprofit lenders offer Small Business Administration (SBA) microloans up to $50,000 with interest rates running from 8% to 13% in most cases.
Kiva business loans
Kiva is a nonprofit that offers interest-free microloans to startups and small business owners across the country. You don't need a credit history to qualify — but you'll need to raise funds from at least five members of your social network before you get approved. It can be a great option for small businesses and entrepreneurs that need a small amount of funding to get started. But it doesn't offer loans over $15,000 and it can take more than a month to get your funds.
| Loan amount | $25 – $15,000 |
|---|---|
| APR | 0% |
CDFI loans
Community Development Financial Institutions (CDFIs) are mission-driven nonprofits that offer low-cost, alternative financing to small businesses. These typically serve one small, geographic area, and must meet certain community development standards set by the US Department of Treasury.
The nonprofit CDFI status allows these alternative lenders to offer low rates and fees on term loans, lines of credit and other funding options to small businesses that may not be able to qualify for a loan at a bank or credit union. Like microlenders, CDFIs aim to help small businesses qualify for a bank loan in the future and tend to offer resources beyond business financing.
Accion Opportunity Fund business loans
Accion Opportunity Fund is one of the few CDFIs that offers financing to small businesses across all 50 states. While not available to startups, you only need to have $50,000 in annual sales to qualify — there are no minimum credit score requirements. In addition to small business loans, Accion Opportunity Fund also offers coaching and mentoring programs to small businesses.
| Loan amount | $5,000 – $100,000 |
|---|---|
| APR | 5.99% to 25.99% |
Advantages: Alternative business loans are fast and easy to qualify for
These are the main benefits of getting an alternative business loan.
- It often only takes a few minutes to apply.
- You can often receive funds within one business day.
- Many alternative lenders require little to no paperwork.
- Alternative lenders often have more flexible requirements than banks when it comes to time in business and personal credit.
- There are lending options for startups and business owners with poor or no credit.
Disadvantages: Alternative business loans are expensive
Consider these drawbacks to alternative business loans before you apply.
- Alternative loans are generally more expensive than a traditional bank loan — even some CDFI loans.
- Shorter loan terms also increase the cost of repayments, compared to a long-term loan.
- Weekly or daily repayments can be inflexible if you have an unexpected drop in revenue.
- There are few regulations protecting small business owners from fintech lenders.
- Online lenders received the lowest customer satisfaction rating compared to other lenders in 2020, according to the Federal Reserve.
7 alternatives to business loans
For many small business owners, a loan might not be the best alternative to traditional financing. Startups in particular have few borrowing options, even from an alternative lender. Consider these business loan alternatives instead.
- Business credit cards may be a less expensive, more convenient source of financing if you need a credit limit under $10,000.
- Crowdfunding allows you to raise money for a new product or service from your current customers and social network.
- Business grants are available through nonprofits and local governments to small businesses and entrepreneurs. These typically offer up to $15,000 in funding — though competition can be tight.
- Startup pitch competitions offer cash prizes for the best business idea. Even if you don't win, the exposure could connect you to investors and other sources of funding.
- Personal loans can be a good alternative for entrepreneurs with good credit that need seed money to start a business.
- Roll over for business startups (ROBS) allows you to fund a startup with your retirement funds.
- Equity financing offers investors a percentage of ownership in exchange for funds. The SBA's Small Business Investment Company (SBIC) program can help your business find an investor.
The SBA works with business centers and other resource partners to offer free or low-cost guidance for business owners who don't know where to begin. You can find an SBA resource partner near you on the SBA website.
Bottom line
Alternative business loans may have a simple application process and few requirements compared to traditional loans. But these funding options can come with APRs in the triple digits and repayments due every day.
Compare personalized business loan options based on your time in business, credit score and revenue.
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