Alternative business loans explained

Struggling to qualify for a traditional bank loan? Many online lenders offer alternative business loans, which work like a cross between a term loan and a merchant cash advance. These are available to businesses in high-risk industries and often have less-strict credit and revenue requirements. But their high costs and daily repayments can make them less forgiving than other short-term loan options.

What’s an alternative business loan?

Technically, an alternative business loan can be any type of business financing from a non-bank lender. These alternative lenders are often based online, and typically provide faster turnaround times compared to banks. Besides getting your money faster, alternative lenders often have more lax eligibility requirements. So if you haven’t been in business for very long or have a low credit score, you may have better luck securing a business loan with one of these lenders. Keep in mind that you might end up paying higher rates than you would at a bank.

You may come across some online lenders who have started to use the term to refer to a specific type of short-term loan that comes with a fixed fee instead of interest. These types of alternative business loans might also be referred to as or working capital loans.

How do alternative business loans work?

Typically, businesses can borrow between $5,000 and $500,000, however, you could find lenders that offer as little as $1,000. How much you are eligible to borrow often depends on your monthly revenue. The maximum loan you can take out is a percentage of what your business brings in each month.

The fee you’re charged is based on how much you borrow and can be advertised as cents on the dollar, a factor ratemore info button or an APR. The typical APR range can fall around 5% to as high as 30%.

Loan terms typically range from a few months to 5 years. If your lender allows extra or early repayments, you should be able to on save on interest by paying your loan back early. Otherwise, you may be charged an early repayment fee worth the amount you would have payed in interest. So read through your contract carefully if you’re thinking about paying off your loan before the end of your term.

What are the eligibility requirements?

One advantage of alternative business loans is that they’re extremely flexible when it comes to eligibility requirements. Many lenders work with high-risk industries like trucking, construction and even gambling. And if you have bad credit, it likely won’t hurt your application — some lenders don’t even run a hard credit check.

However, this option typically isn’t available to startups — you often need to be in business for at least 3 to 6 months to qualify. And most lenders require a minimum monthly income between $5,000 and $15,000.

3 alternative business loan providers

These 3 business lenders offer financing that works like an alternative business loan — though not all refer to it by that name. Let’s take a look at how they compare.

1. SharpShooter Funding

• Loan amounts: $4,160 to $150,000
• Typical APR: Fee based, prime starting at 6.33%
• Terms: 3 - 24 months
• Eligibility requirements: You would need to be in business for at least 100 days, make a minimum of $115,992 in annual revenue, be at least 18 years old and have a credit score of 416 or higher.

SharpShooter Funding offers business loans and merchant cash advances. You can typically get your funds within 48-72 hours. For an alternative business loan, its terms are relatively long — up to 2 years. However, it will charge a $45 incoming wire fee when applicable.

2. OnDeck

• Loan amounts: $5,000 to $300,000
• Typical APR: 8.00% – 29.00%
• Terms: 6 months to 18 months
• Eligibility requirements: To be eligible, you must have been in business for at least 6 months with a minimum annual gross revenue of $100,000.
  
  
  OnDeck offers fast and simple financing. Apply in less than 10 minutes with your basic business information and see your loan offers without hurting your credit score. Get approved within 1 business day, and choose your term, amount and payback schedule once approved.

OnDeck offers secured business loans in amounts from $5,000 to $300,000. A general lien is placed on business assets until the loan has been paid in full. A personal guarantee is also required from the business owner, but there is no lien placed on his or her personal assets. Its monthly deposit requirements are on the higher end, though. Your business needs to bring in at least $100,000 a month to qualify.

3. Lending Loop

• Loan amounts: $1,000 to $500,000
• Typical APR: Starting at 4.96%
• Terms: 3 - 60 months
• Eligibility requirements: Annual business revenue of at least $100,000, at least 1 year in the business, minimum credit score of 600+.

Lending Loop offers business loans to entrepreneurs and small business owners who have been in operation for at least 12 months. Loans from $1,000 to $500,000 are available for businesses that generate at least $100,000 in annual revenue. The typical turnaround time is 2 - 14 days.

What are the benefits of an alternative business loan?

From its minimal eligibility requirements to its quick turnaround, there are plenty of perks of taking out an alternative business loan:

• High-risk industries accepted. Law firms, trucking companies — even cannabis businesses — may be eligible for an alternative business loan.
• Fast funding. Typically, you can get your money within 1 or 3 business days after submitting your application.
• Bad credit is OK. Most lenders are willing to work with business owners who have low credit scores – even in the 400s.
• Collateral may not be required. In some cases, you won’t have to risk losing a car or real estate if you default on an unsecured loan.
• Often no personal guarantee required. Many alternative business loan providers won’t require you to back your loan with your personal or business assets, though some might.

What are the drawbacks?

While it’s usually easier to qualify for an alternative business loan than traditional financing, this comes at a high cost. Consider these potential drawbacks before applying:

• Frequent repayments. Repayments might be required as frequently as every business day. That make it difficult for your business to expand. And you risk defaulting if your business has several off days.
• High cost. You could end up paying an APR as high as 30%. Plus, many lenders charge origination fees on top of this.
• Short terms. You could end up being required to pay back the full amount of your alternative business loan in 5 years or less.
• Often lacks transparency. It’s hard to find an alternative business loan provider that quotes the full range of fees on its website — you usually have to call for more details.
• Might not save by paying off your loan early. Unless your lender allows prepayments, you could still pay the same amount in fees no matter how much time you take to repay the loan.

Types of alternative loans

There are many types of loans that can fall under the “alternative business loans” category. Check out the non-bank financing options below:

• Business credit cards. These can be more flexible than loans, as your credit is revolving. This means you can spend up to your credit limit, and you’ll gain the ability to spend again as you pay off what you owe.
• Merchant cash advances. These work a lot like other types of business loans, except the loan and repayment amount are determined by your business’s daily credit card sales.
• Invoice financing. This is when a lender gives you an advance on your pending invoices. You submit your invoices to the lender, and you’ll receive the amount of the invoice minus a percentage as payment. When the client pays you, you pay back the lender.
• Invoice factoring. You can sell your unpaid invoices to a third-party for a percentage of the invoice’s value. The third-party company will then collect the full amount of the invoice from the customer on your behalf.
• CSBFP loans. The Canada Small Business Financing Program (CSBFP) Loan is a government-backed loan offering up to $1,000,000 in funding and some of the most competitive interest rates. To apply, you’ll need to head to your local registered financial institution and ask if they offer CSBFP loans. While government-backed, the decision to approve your loan ultimately lies with the financial institution.
• Crowdfunding. Businesses in high-risk industries like cannabis might have better luck securing funding through crowdfunding than applying for a business loan.

Compare the best non-bank business loans

Compare business loan providers in detail

You can sort the providers in the table below by interest rate, loan term or minimum credit score required. You can check the compare box below two or more providers to compare their features side-by-side.

Bottom line

Alternative business loans are best treated as a last resort for poor-credit borrowers or businesses in high-risk industries. They’re one of the more expensive business financing options out there, but often offer fast turnaround times.

If you’re interested to learn more about how business financing works in general, read through our comprehensive guide to business loans.

Frequently asked questions

• Do I need to back an alternative business loan with a lien on my business assets?

  It depends on your lender. Some don’t require a business or personal guarantee for an alternative business loan. In that case, your business and personal assets aren’t on the line if your business defaults.

• Are there any low-cost alternatives to bank loans besides CSBFP loans?

  There are, but those kinds of loans are usually only available to businesses with a high annual income and good credit score. Basically, the less risky your business is, the lower your business loan will cost.

• Are alternative business loans available to startups?

  Generally, you can’t get an alternative business loan to start a business. But you can often qualify for one early on in operations — many lenders are willing to work with businesses that have been around for at least 3 to 6 months. You can learn more about your options by checking out our guide to startup business loans.