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Key Takeaways
Alternative lending options are available online and through fintech. The requirements for alternative business loans are usually more flexible than traditional lending options, but they can also be more expensive. Merchant cash advances, microloans, and crowdfunding are examples of alternative lending.
Obtaining small business financing can be difficult, especially as banks begin to tighten lending. Compared to Q3 2022, new small business loans fell 18.1% in Q3 2023 and were down 16.4% from Q2 2023. So what can small businesses do if they have a great idea but can't get approved for traditional financing?
While not all businesses can meet traditional lending requirements, such as a credit score of 700 or annual revenue of at least $200,000, alternative financing is a viable option that can offer flexibility and quicker funding.
Read on to learn more about how you can use alternative financing to avoid traditional business loan requirements.
What is Alternative Lending?
Most small businesses obtain funding through a traditional small business loan, an SBA loan, or a line of credit.
Alternative lending refers to any type of lending other than traditional bank or credit union lending. This can include microloans, crowdfunding, or private direct lending. Alternative lending can give small businesses access to more capital or avoid some of the fees associated with traditional banks.
Many of the best small business loans are available through alternative lenders. Some of these lenders offer conventional and SBA loans, some offer equity loans to small businesses, some provide fundraising platforms, and many even lend without the strict credit requirements that banks have.
Alternative vs. Traditional Lending
Alternative and conventional loans each have their pros and cons, including different terms, interest payments, and credit check requirements.
Alternative Lending Traditional Lending May not require a credit check Requires a credit check and minimum score for approval Often allows investors to pool their funds Offers full or no-money approval from a single source May be able to offer flexible terms Offers loans with preset terms May or may not require repayment Always must be paid back with interest May take time to accumulate and distribute funds Once a loan is approved, funds are often distributed quickly Often suitable for small to medium sized loans Best for small to large loans Online and Fintech Lenders Banks and credit unions Usually allows you to apply online Usually only possible in person or over the phone Minimal documentation requirements Often requires detailed documentation
Types of Alternative Lenders
Here are some of the most common types of alternative lenders.
Online Lenders
Getting a loan from an online lender works similarly to a business loan from a traditional bank or credit union. Online lenders often have more flexible qualification requirements than large banks and often grant loans faster. However, they may have higher interest rates and shorter repayment terms.
Online lenders offer a variety of business loan types, including the ever-popular term loans and lines of credit, as well as less-standard options like invoice factoring and merchant cash advances.
Bankrate Insights
Online lenders offer a variety of small business loans with flexible eligibility requirements, so you may have a better chance of being approved than with traditional lenders.
Popular online lenders offering business loans include:
Crowdfunding
Popular crowdfunding platforms like Kickstarter and Indiegogo allow small businesses to raise funds from individual donors. Crowdfunding allows you to choose from four types of funding: donations, equity, rewards, and debt.
Donations: Donors give any amount they like to a campaign but receive nothing in return for their donation. Equity: Donors receive shares in the company in exchange for their donation. Rewards: Donors receive a product or service in exchange for their funding. Debt: Donors give a certain amount of their donation as a loan and repay it with interest within a certain period of time. However, Kiva is one platform that does not charge interest on loans.
Of these types of crowdfunding, reward-based or equity-based crowdfunding is the most common type used by businesses. The SEC allows businesses to raise up to $5 million per year through regulated crowdfunding. Most funding types do not require you to pay back the money you raise through crowdfunding. However, many crowdfunding platforms will not pay you out if you don't reach your funding goal.
Direct Private Lenders
You may also be able to find angel investors for your business. These investors will provide financing for your company using their own personal funds. Direct personal loans usually have fewer restrictions than traditional loans, but they may also want a quick return on their investment.
Common ways to connect with private lenders include through an attorney or through online platforms designed for angel investors.
Peer-to-peer lenders
Peer-to-peer lending (also known as P2P lending for short) involves requesting funds via an online platform, which then provides the loan to individual lenders. Investors can choose to fund the entire loan or a portion of it. Often, multiple anonymous lenders are responsible for the loan.
Some sites also offer peer-to-business loans designed for small businesses.
Loans usually come with interest charges, and in some cases, interest rates can be comparable to traditional business loans.
What types of loans can you get from alternative lenders?
Alternative lenders offer several types of business loans, and the maximum loan amount varies by lender.
Loan Type Average Amount Purpose Term Loan $1 million and up Cover almost all your business needs, including operating expenses, inventory, supplies, and equipment Microloan Up to $50,000 Start-up and operating expenses Line of Credit Up to $250,000 Improve your cash flow and cover short-term expenses and purchases for your business Merchant Cash Advance $300,000 and up Quick cash to cover short-term expenses and purchases for your business Invoice Factoring or Invoice Financing 70% to 90% of your outstanding invoice amount Quick cash to cover short-term expenses and purchases for your business Equipment Financing Up to $5 million Purchase equipment, such as machinery and vehicles
The Pros and Cons of Alternative Business Lending
There are pros and cons to using alternative financing instead of a bank loan.
Strong Points
Flexible eligibility Personal guarantees may not be required Easy application No restrictions on how funds can be used Faster funding
Cons
High costs May not allow you to build business credit Short terms Requires research to determine the best financing option
Conclusion
Alternative financing can be a good option for businesses that can't qualify for traditional loans or can't find favorable terms. If you're raising money from multiple sources, such as crowdfunding, keep in mind that it may take longer to raise funds.
Alternative Financing FAQs
What are some examples of alternative financing?
Alternative lending technically refers to funding from sources other than traditional banking institutions. Examples of alternative lending include peer-to-peer lending, crowdfunding, and direct private lending. Alternative lending often offers more flexible terms and may be a good fit for start-ups, businesses with poor credit, or businesses in need of small loans.
What are the most popular forms of alternative financing?
Loans from online lenders are popular, but so is crowdfunding: the global crowdfunding market is expected to grow to more than $28 billion by 2028. Crowdfunding allows small businesses to receive small investments from individual donors that usually don't need to be repaid.
Do alternative lenders offer higher or lower interest rates?
Alternative lenders offer a range of interest rates, often comparable to traditional loans and sometimes based on the lender's credit score, although many direct private lenders base their interest rates on additional factors, such as business potential.
What are the alternatives to bank financing?
If you don't want to use a bank, you can also borrow from individuals. Peer-to-peer lending, direct personal loans, or crowdfunding donors can help you avoid traditional lending.