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By Jennifer SokolowskyAlternative Loans and Financing
for Small Businesses
An Explanation of the Different Types of Alternative
Loans and Financing for Funding Your Small Business
When you want to grow your business, you need the right funds and resources to break into new markets, promote your services and pay your operational costs. While some organizations may have enough of a financial cushion to grow organically, others will need to seek out alternative small business financing to help them scale.
If your small business has a good credit history and wants to commit to borrowing over three to five years, a small business loan can be a good idea. If you’ve not yet built up a strong credit history or score or you want to borrow for a shorter period, you will probably need a different type of financing.
We’ve gathered information on the various ways you can borrow money to grow your business. Our comparison of the below alternative financing methods can help you decide on the best way to get the money your business needs.
Compare Different Types of Traditional
and Alternative Business Financing
Here’s how the various traditional and alternative business financing types compare to each other.
| Requirements | |||||||
|---|---|---|---|---|---|---|---|
| Type of funding | Structure | Application | Credit Score | Collateral | Business History | Speed of Receiving Funds | Repayment Terms |
| Bank loan | Fixed-term loan | Personal and business credit history, free cash flow, income statement, balance sheet | The higher the better | Yes, on secured loans | 3 years or more | 2 weeks or more | Monthly payments over the lifetime of the loan, typically 1-5 years |
| Credit card | Rotating credit | Personal and business credit history, business income, overall finances | The higher the better; this is the biggest single factor in getting a business credit card | No | 3 years or more | Can be days to weeks; you will receive a credit limit, rather than funds | Revolving loan with a monthly payment, usually 1%-2% of balance |
| Online lender | Cash advance/credit line | Varies, and relies more on proving business revenue | Medium-high credit, rolling terms based on credit score | No | 1-2 years | 1-7 days | 3-, 6-, 12- or 24-month terms; payments varying from daily to monthly; penalty for early repayment |
| Merchant cash advance | Cash advance | Varies, and relies more on proving business revenue | Low to none | No | 1 year | 1-7 days | Fixed percentage of revenue until advance is repaid |
| SBA loan | Fixed-term loan | Extensive, in-depth paperwork, personal and business documentation including detailed business history | The higher the better | Yes | 2 year | 1 month or more | Monthly payments over the lifetime of the loan |
| Crowdfunding | Crowdsourced funds | Meet platform rules; create campaign, marketing, social media and other factors to promote | Not relevant, although a history of success can be beneficial | No, but you may want to offer “rewards” to backers | Not relevant, although a history of success can be beneficial | Depends on length of campaign | No need for repayments, although you typically have to offer products or services in lieu of repayment |
| Peer-to-peer lending | Peer-to-peer | Good annual revenue, several years in business, good business pitch, personal credit history | The higher the better | No | 2 years or more | 4-8 days | Schedule varies, but anywhere between 6 months and 10 years |
Below, we’ll dig into each of these types, explain what they are, share the benefits and drawbacks, see if they could be right for your business and provide some examples of the major alternative finance providers are in each area.
Traditional Bank Loans
Traditional bank loans are typically fixed-term loans where a bank provides a certain amount of capital up front. You then repay that capital over a certain period of time, normally on a monthly basis. Banks charge interest on any outstanding balance until the loan is repaid in full.
Benefits of Traditional Bank Loans
- Low interest rates, normally tied to the base rate
- Fixed payments made on a monthly basis for easier budgeting
Drawbacks of Traditional Bank Loans
- Excellent personal and business credit scores and history are needed for the most favorable terms
- Poor personal and business credit scores likely mean your loan will be rejected
- Extensive documentation needed (including free cash flow report, income statement and balance sheet)
- Collateral needed on secured loans
- Generally requires at least three years of business history
- Typically takes two weeks or more for approval and receipt of funds
Traditional Bank Loans Could be Right for Your Business Financing If…
- You have an established business history
- You have a good personal and business credit score
- You can provide all the necessary documentation
- You don’t need the funds right away
- You want to pay back the funds over an extended period of time
- You want a lower interest rate
Major Providers of Traditional Bank Loans
- Wells Fargo
- Citibank
- Morgan Stanley
- Chase
- Bank of America
- PNC
Small Business Administration Loans
Small Business Administration (SBA) loans are a special type of financing available to American businesses and entrepreneurs. The U.S. Small Business Administration works with lenders to “guarantee” part of the amount lent to businesses, meaning that lenders are willing to take on slightly more risk to provide financing to new and established ventures.
Benefits of Small Business Administration Loans
- Available to some businesses that may carry slightly more “risk” than a traditional bank would be willing to take on
- Low interest rates (normally tied to the base rate)
- Fixed payments made on a monthly basis for easier budgeting
Drawbacks of Small Business Administration Loans
- Excellent personal and business credit scores and history are needed for the most favorable terms
- Extensive in-depth paperwork required
- Personal and business documentation needed (including detailed business history, free cash flow report, income statement and balance sheet)
- Collateral needed on secured loans
- Need to have two or more years of business history
- Typically takes a month or more for approval and receipt of funds
Small Business Administration Loans Could be Right for Your Business If…
- You have an established business history
- You have a good personal and business credit score
- You can provide all the necessary, in-depth documentation
- You don’t need the funds right away
- You want to pay back the funds over an extended period of time
- You want a lower interest rate
Major Providers of Small Business Administration Loans
- Wells Fargo Bank
- Huntington National Bank
- Chase Bank
- S. Bank
Credit Cards
Credit cards provide your business with “revolving credit” and a credit limit you can draw down against. They typically have very flexible repayment periods, although interest rates can be high.
Benefits of Credit Cards
- Flexible repayment periods
- A “credit limit” means you only need to borrow as much as you need at any given time
- Typically, you only need to pay around two percent of the balance back each month
Drawbacks of Credit Cards
- Higher interest rates
- Making just the minimum monthly payment without significantly reducing the capital borrowed means you will end up paying a great deal in interest
- Requires good to excellent personal and business credit scores
- Poor personal and business credit scores mean your credit card application will be rejected
- Extensive documentation needed including free cash flow report, income statement and balance sheet
- Generally requires three or more years of business history
- Typically takes two weeks or more for approval and receipt of card
Credit Cards Could be Right for Your Business If…
- You have an established business history
- You have a good personal and business credit score
- You can provide all the necessary documentation
- You don’t need funds right away
- You want flexibility over repayments
- You don’t mind a higher interest rate
- You understand the risks and extra interest in not paying down the capital borrowed
Major Providers of Credit Cards
- Capital One
- Wells Fargo
- Citibank
- Morgan Stanley
- Chase
- Bank of America
- PNC
Peer to Peer Lending
Peer to peer lending (P2PL) is a type of loan where a small business owner “outsources” funding needs to many personal and institutional lenders, who all contribute a small amount to the loan. This is all handled through a P2PL platform that consolidates these mini-loans together and provides the funds to you as one master loan.
Benefits of Peer to Peer Lending
- Fairly competitive interest rates, based on credit score
- Fairly rapid access to funds (around four to eight days)
- Extended repayment terms are available (sometimes up to 10 years)
Drawbacks of Peer to Peer Lending
- Good to excellent personal and business credit scores and history are needed for the most favorable terms
- Poor personal and business credit scores mean your loan will be rejected
- Documentation needed includes annual revenue
- Two years or more of business history needed
Major Providers of Peer to Peer Lending
- Lending Club
- Funding Circle
- Street Shares
- Upstart
Online Business Lenders: Cash Advances and Credit Lines
Online business lenders are specialist firms that provide financing to small and medium businesses. They are more focused on small businesses than typical banks. If you choose a cash advance or credit line based on revenue, their requirements are less stringent than banks.
Benefits of Online Business Lenders: Cash Advances and Credit Lines
- Typically do not need high credit scores or extensive business/personal credit history
- It’s possible to receive funds as soon as the next business day
- Provide a cash advance or line of credit you can draw down against
- Normally require just one year of business history
Drawbacks of Online Business Lenders: Cash Advances and Credit Lines
- Higher interest rates
- Can include a penalty for early repayments
- Must be able to prove business income and revenue
Online Business Lenders: Cash Advances and Credit Lines Could be Right for Your Business If…
- You don’t mind paying a higher rate of interest
- You don’t have an extensive business history of two years or more
- Your personal or business credit scores are below good or excellent
- You can prove the revenue of your business
- You understand there may be a penalty for early repayment
Online Business Lenders: Cash Advance and Credit Line Providers
- BlueVine Capital
- Credibly
- Fundbox
- Kabage
Merchant Cash Advances
A merchant cash advance (MCA) gives you an advance in funding on expected future revenue. In return, you grant the MCA provider rights to a portion of your future business revenue for a certain amount of time.
Benefits of Merchant Cash Advances
- No need for business or personal credit history or high credit scores
- Receive funds as soon as the next business day
- Normally requires just one year of business history
Drawbacks of Merchant Cash Advances
- Higher interest rates
- Need to be able to prove business income and revenue
- Gives up a future portion of business revenue to repay advance
Merchant Cash Advances Could be Right for Your Business If…
- You don’t mind paying a higher interest rate
- You understand that MCAs are for short-term financing
- You don’t have an extensive business history of two years or more
- You don’t have a good or excellent personal or business credit score
- You can prove the revenue of your business
- You can repay a fixed percentage of revenue
Merchant Cash Advance Providers
- Sky Bridge
- Snap Advance
- Sure Payment Solutions
Invoice Factoring
Invoice factoring means that a factoring business offers to “purchase” your invoices for you, and will then typically forward you 80% of the value of the invoice. They will collect payment from your customer, and once payment has been made will forward you the balance less their factoring fees.
Benefits of Invoice Factoring
- Your personal and business credit history does not play a major part in invoice factoring
- Receive funds in one to seven business days
Drawbacks of Invoice Factoring
- The invoice factoring company will often base their factoring decisions on the creditworthiness of the customer you are invoicing
- Need to have invoices you can sell to the factoring company
- Gives up a future portion of invoice revenue to repay advance
Invoice Factoring Could be Right for Your Business If…
- You don’t mind giving up a portion of future invoices
- You have invoices to sell
- You don’t have an extensive business history of two years or more
- You don’t have a good or excellent personal or business credit score
- Your customers are creditworthy
Invoice Factoring Providers
- Universal Funding Corp
- Riviera Finance
- Paragon Financial Group
- New Century Financial
- Charter Capital
Crowdfunding
Crowdfunding allows you to get funds for your business idea or service by appealing to the public. They provide funding in return for rewards and promises of future products or services.
Benefits of Crowdfunding
- No need for business or personal credit history or high credit scores
- You do not need to “repay” any money, although you will need to provide products, services and rewards
- Your business history does not play as big a factor in approval, although a track record of success will be helpful
Drawbacks of Crowdfunding
- Successful crowdfunding campaigns can be difficult to create, promote and manage
- Platform rules need to be followed
- Promotion of crowdfunding campaigns can require a large amount of time, effort and resources
- Crowdfunding is a very competitive space
Crowdfunding Could be Right for Your Business If…
- You have the time and effort to create, manage and promote a crowdfunding campaign
- You have an innovative product or service that will capture people’s interests
- You can offer incentives, rewards and promises of future products
- You do not want to repay borrowed funds
- You have a track record of success
- You don’t have an extensive business history of two years or more
- You don’t have a good or excellent personal or business credit score
Crowdfunding Providers
- Kickstarter
- IndieGoGo
- Fundable
We hope you’ve found this comparison of alternative funding for businesses helpful, and that you can make an informed decision on the right choice for your financing needs.
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