8 Alternative Lending Solutions for Businesses to Consider
Securing traditional lending for your business can be challenging and take longer than you’d like, thanks to strict eligibility criteria and lots of paperwork. Fortunately, there are alternative financing solutions available.
These alternative types of financing options are often more flexible and faster than loans from traditional financial institutions, and they are available to all types of businesses.
In this article, we’ll explore some of the most popular alternative lending solutions available. We’ll cover options like working capital advances, business lines of credit, and others that could help you secure the funds your business needs.
8 Alternative Lending Solutions
Alternative lending solutions are designed to offer the speed and flexibility that today’s businesses require, especially when traditional business loan requirements aren’t a good fit.
You can secure the capital you need whether you have a startup company you’re looking to expand or an established business that needs a more customized financing option. Keep reading to find the right fit.
1. Peer-to-Peer Lending (P2P Lending)
Peer-to-peer lending is an online funding method that connects businesses directly with individual investors, bypassing traditional financial institutions. A popular P2P lending platform is Kickstarter, but there are others, such as Prosper and StreetShares.
You’ll start by uploading details about your business proposal, why you’re borrowing, and how much you need to borrow on your chosen P2P platform. Investors can review your proposal, decide whether to offer funds, and then contact you with competitive rate offers. This approach blends elements of crowdfunding and marketplace lending with more traditional lending, creating an attractive alternative for businesses to access capital. However, you only receive the financing if you raise the full amount you request.
Positives
Easier approval: Many borrowers find the simpler and less stringent application process for P2P financing easier than applying for traditional bank loans. It is also more forgiving of bad credit.
Fast funding: Getting the financing you need on a P2P platform can take as little as three days to a week.
Creating buzz: Social media campaigns that promote your proposal and build up momentum can build enthusiasm, potentially securing investors who also become customers.
Negatives
Higher interest rates: Since collateral isn’t always required, higher interest rates are the norm in P2P lending — large and small businesses alike can expect to pay 8.99% to 35.99% APR on a P2P loan.
Variable rates: Interest rates may fluctuate, meaning your monthly payments could go up (or down) depending on market conditions.
Eligibility limitations: Many P2P lending platforms require borrowers to have a minimum credit score, and some may restrict specific industries or startups from applying.
2. Accounts Receivable Financing
Accounts receivable financing (or invoice factoring) is another alternative lending solution that allows businesses to sell their unpaid invoices to a factoring company. The company then advances you a lump sum based on a percentage of the invoice amount, typically between 70% and 90%. When the customer pays, you get the rest minus the factoring fee.
This type of alternative lending is primarily available to business-to-business (B2B) and business-to-government (B2G) companies, not those who sell directly to consumers.
Positives
Flexible options: Many factorers allow you to choose which invoices to send them, giving you more control over your cash flow.
No credit score requirement: Invoice factorers base their approval rates on your clients’ creditworthiness, not yours.
Fast funding: Once you send your invoice to the factorer, you can receive funds in as little as 24 hours.
Negatives
Costly: Fees and interest on outstanding invoices can add up, making factoring a more expensive option over time when compared to other small business lending options.
Credit control concerns: Some factoring companies may operate without non-notification services, meaning you can’t always control how customer interactions are handled if the factorer aggressively pursues overdue invoices.
Personal liability: In some cases, you may be personally responsible for invoices they can’t collect on if your business fails. However, some lenders offer non-recourse factoring to businesses with solid histories.
3. Merchant Cash Advances
With a merchant cash advance, you receive a lump sum based on future sales made via credit and debit card transactions. The lender then takes a percentage of your daily card sales until the advance is paid off.
Positives
Fast approval: You can get the business financing you need in as little as 24 hours.
No collateral: Unlike some alternative lending options, you don’t need to sign over collateral or agree to a personal guarantee.
Flexible repayment terms: What you repay is a percentage of the daily sales you take on cards. So, if business is slow, you pay less.
Negatives
High cost: Factor rates can be as high as 30% or more, so borrowing $50,000 might cost you as much as $65,000, even if you repay the loan quickly.
Cash flow: Daily repayments can strain your cash flow if your business operates on narrow margins, and you risk insolvency if you suffer a prolonged dip in revenue.
Restricted access: Businesses with low card sales might struggle to get their loan application approved for merchant cash advances.
4. Small Business Administration (SBA) Loans
The Small Business Administration guarantees SBA loans, the main U.S. government agency that supports small businesses and entrepreneurs.
The two most popular types of loans are the SBA 504 and the SBA 7(a). Both options are popular alternative financing solutions for small business owners seeking loans of up to $5.5 million. Each type of SBA loan is different, but they share the following positives and negatives.
Positives
Competitive terms: SBA loans offer lower interest rates and longer repayment terms than traditional loans.
Build credit: SBA business lending is easier to obtain than bank loans. Plus, your credit score could improve if you manage your account well.
Flexible use: SBA loans can be used for things like debt refinancing, equipment financing, and working capital, provided you apply for the correct loan type.
Negatives
Slow processing: Due to extensive paperwork, getting SBA small business loans may take a couple of months.
No guaranteed approval: While SBA loans have more favorable eligibility requirements than traditional loan options, you still must apply, and there isn't a guarantee that you'll be approved.
Down payment required: Most SBA loans require a down payment of 10% or more of the total project or plan cost.
5. Angel Investors and Venture Capital
Angel investors and venture capitalists (VCs) are two similar options that provide funding in exchange for equity.
Angel investors work with startups and early-stage businesses to add enough value to your business with varying time frames, goals, and exit strategies. This can range from a two- or three-year exit plan to longer-term growth goals and holding their stakes for upward of 10 years.
Venture capital firms then seek to drive rapid growth to sell their stakeholding to a private equity firm for a big profit.
Positives
Guidance and support: Angel investors and VCs often offer mentorship and access to their know-how and connections.
Significant capital: These investors can access their own funding plus additional capital from non-bank financial institutions and other alternative lenders if necessary.
No monthly repayments: Unlike with standard and other alternative loans, you don’t need to make monthly repayments to your angel investor or venture capital firm, though some may take bonuses and dividends.
Negatives
Equity dilution: Angel investors and VCs typically offer funding in exchange for shares in your company, which can reduce your ownership percentage. They may also seek board seats, voting rights, or veto power.
Pressure to perform: You’ll be expected to deliver results for your investors. Underperformance may lead to changes in leadership or strategy, and you risk being fired from your business.
Highly competitive: Competition for angel investors and VCs is fierce, even with accelerators and online platforms like AngelList, so your business plan and leadership must be exceptional.
6. Business Credit Cards
Business credit cards are another option for entrepreneurs who need quick access to cash for inventory, equipment purchases, and day-to-day operational costs. While convenient if you encounter unexpected cash flow issues, business credit cards can be expensive and lead to ballooning debt.
Positives
Easy access: There are many options on the market, so obtaining a business credit card should be relatively easy for most companies.
Rewards programs: Many cards offer money back or discounts on common business expenses.
Credit building: Properly managing your credit card can boost your business credit score.
Negatives
Limited funding: You won’t be able to borrow as much with a credit card as you would with a loan or another alternative lending option in most cases.
Short-term funding: Businesses may need to pay off balances quickly, ideally within one billing period. Carrying a balance can lead to high and compounding interest rates.
Personal liability: Some credit card companies require a personal guarantee. If your business fails, this puts your personal assets at risk.
7. Business Line of Credit
Business lines of credit are flexible, revolving financing options offered by traditional financial institutions and alternative lenders, including fintech companies like Backd. These funding options give businesses access to a predetermined amount of funds that they can draw on as needed. For example, Backd offers business lines of credit ranging between $10,000 and $750,000.
Positives
Genuine flexibility: You can withdraw funds whenever they’re needed, and you’ll only pay interest on the borrowed amount.
Self-replenishing: Once you make a repayment, that amount of credit becomes available to borrow again.
Credit-friendly: You may be able to be approved with a fair credit score. For example, Backd only requires a minimum FICO Score of 625, while traditional lenders often require 680 or more.
Negatives
Revenue requirement: Businesses with low revenue may not qualify for a business line of credit. For example, Backd requires businesses to have at least $100,000 in monthly revenue.
History required: Many business lines of credit — from Backd and similar institutions — require applicants to have established business credit with at least two years’ operating history. That means this isn’t an option for startups.
Lower credit limit: If you need to borrow an amount in the millions, then this is likely not the right option for your business.
8. Working Capital Advance
A working capital advance provides a lump sum of cash upfront and is typically repaid through frequent regular payments. You can secure between $10,000 and $2 million in funding with alternative lenders like Backd, which can be beneficial for launching short-term projects or for businesses with cyclical revenue patterns.
Positives
Better cash flow management: You can manage gaps in your cash flow caused by slow periods and unexpected bills.
Fast funding: Businesses can secure funding quickly with minimal wait times between steps. For example, applying with Backd takes just three minutes, and your funds could be available in as little as 24 hours.
Seasonal flexibility: Working capital advances can greatly help businesses that receive most of their revenues during peak periods.
Negatives
Eligibility requirements: Startups may not qualify for a working capital advance. For example, with Backd, applicants must have business credit, a brick-and-mortar address based in the U.S., and at least one year in operation to qualify.
Frequent repayments: You will often need to make repayments daily, weekly, or semi-monthly payments, which means that working capital advances are best for businesses that have an expected cash flow injection for paying back what they borrowed.
Potential for over-reliance: Some businesses may rely too heavily on funding from working capital advances, particularly when used for long-term projects.
Traditional Financing vs. Alternative Lending
Alternative lenders, such as peer-to-peer lending platforms, invoice factorer, and online lenders like Backd, differ from traditional financing solutions offered by credit unions and banks in several ways. Below, we’ve highlighted information about what each type of solution offers to help you decide which type of provider is best for your business.
Approval Process and Speed of Funding
Traditional financing: These options often involve extensive paperwork, collateral, credit checks, and a lengthy approval process. It may take weeks or even months to receive the funding.
Alternative lending: When you opt for an alternative lender, you may get a more flexible and faster approval process with less stringent criteria, reduced paperwork demands, and often no collateral required. For example, the application process with Backd takes a few minutes, and approval is possible within just 24 hours — no personal guarantees or collateral required.
Eligibility Requirements and Flexibility
Traditional financing: Banks and credit unions often have stringent criteria, like requiring higher credit scores, an established financial history, and personal guarantees. Traditional options may also come with restrictions on how you can use the loan.
Alternative lending: Many alternative lending options like those offered by Backd feature eligibility criteria that’s more accessible, like a credit score of at least 625, established business credit, and 1-2 years in operation.
Interest Rates and Fees
Traditional financing: Traditional loans may offer lower interest rates, but they also have higher upfront fees with strict late payment penalties and much longer approval time frames.
Alternative lending: Interest rates are sometimes higher for alternative lending, but in exchange, you get faster approvals, increased flexibility, and more favorable application criteria.
Pick the Right Alternative Funding Solution for You
Alternative lending options have emerged in response to the evolving needs of businesses in today’s fast-paced climate. These alternatives offer faster, more flexible processes that you can tailor to the specific needs of your business.
Backd stands out among alternative lending providers with an accessible application process and quick funding, which makes it easier for established companies to secure the capital they need, when they need it.
If you're ready to take the reins on your business's financial future, apply with Backd today and receive funding as soon as tomorrow.
