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.
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 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
Drawbacks of Traditional Bank Loans
Traditional Bank Loans Could be Right for Your Business Financing If…
Major Providers of Traditional Bank 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
Drawbacks of Small Business Administration Loans
Small Business Administration Loans Could be Right for Your Business If…
Major Providers of Small Business Administration Loans
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
Drawbacks of Credit Cards
Credit Cards Could be Right for Your Business If…
Major Providers of Credit Cards
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
Drawbacks of Peer to Peer Lending
Major Providers of Peer to Peer Lending
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
Drawbacks of Online Business Lenders: Cash Advances and Credit Lines
Online Business Lenders: Cash Advances and Credit Lines Could be Right for Your Business If…
Online Business Lenders: Cash Advance and Credit Line Providers
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
Drawbacks of Merchant Cash Advances
Merchant Cash Advances Could be Right for Your Business If…
Merchant Cash Advance Providers
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
Drawbacks of Invoice Factoring
Invoice Factoring Could be Right for Your Business If…
Invoice Factoring Providers
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
Drawbacks of Crowdfunding
Crowdfunding Could be Right for Your Business If…
Crowdfunding Providers
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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