SBA Loan Alternatives: Types of Financing and Lenders to Try
The Small Business Administration (SBA) loan program is a popular choice for many entrepreneurs seeking funding. But if your business can’t meet SBA lenders’ minimum eligibility requirements, you’ll want to explore SBA loan alternatives.
Read on to learn about eight funding alternatives and other types of lenders you can consider.
8 SBA Loan Alternatives You Can Apply For
Let's examine eight alternatives to SBA loans that small business owners can consider for their business funding needs.
1. Microloans
Microloans are small, short-term loans often provided by non-profits and government agencies. Each lender has their own eligibility criteria; however, you should find it easier to be approved for a microloan than a traditional bank loan. They generally don’t require a perfect credit history or a collateral pledge, making them suitable for startups and new businesses.
Microloan Advantages
Fast approval: Microloan lenders turn around loan applications very quickly, meaning you don’t have to wait long for your money if they approve your request.
Flexible criteria: It’s often easier to meet the eligibility requirements of a microloan, making it a good option for startups or businesses that are struggling to qualify for traditional loans.
No collateral needed: Most microloans don’t require you to put down collateral, so you won’t need to put your business or personal assets at risk when borrowing the money.
Microloan Disadvantages
Limited loan amounts: Each microloan lender will have its own maximum loan amount. But some may be as low as $2,000 or as high as $250,000. This means you may struggle to get the full funding amount you’re looking for.
Higher interest rates: Because microloan lenders often provide funding to new businesses or those with low credit scores, they are taking on more risk. To offset this risk, the microloan may have a higher interest rate. Each lender’s rate will vary.
2. Business Credit Cards
A business credit card is a type of revolving credit. You’re given a credit limit — the maximum amount you can borrow. But every time you pay back the money you’ve used, it becomes available for you to use again. You’ll pay interest on the money you’ve borrowed if you’re unable to repay the balance in full each month.
Business Credit Card Advantages
Credit-building opportunity: If you use your card responsibly, it can improve your credit score, making it easier for your business to qualify for a range of loan options in the future.
Better cash flow: When you pay with a credit card, you can delay payment until the next month or longer, helping you manage cash flow. This is different from paying with a debit card, where the money is taken from your account right away.
Handy employee cards: You can apply for employee business credit cards, which makes it easier to track their transactions and set spending limits for them.
Rewards: Some cards allow you to earn points or cashback when you use the card.
Business Credit Card Disadvantages
Risky personal liability: You may be required to sign a personal guarantee, making you liable to repay any outstanding debt if your business can’t.
High interest rates: Even if you have good credit, the interest rate on a business credit card is often much higher than a standard business loan.
Snowballing debt: If credit cards are used for unplanned or long-term expenses that you can’t pay for within a month or so of making the purchase, you may accumulate a lot of debt very quickly due to compounding interest.
3. Business Lines of Credit
A business line of credit is also a form of revolving credit. Think of it as a pool of stand-by money you can access to cover expenses and manage cash flow. You only pay interest on the money you withdraw and whatever you pay back becomes available to borrow again.
Business Line of Credit Advantages
Improved cash flow: You can draw down funds when you need them to deal with late payments, seasonal slowdowns, or unexpected costs.
Better credit rating: If you manage your business line of credit well, this may open other lenders’ doors to you later on.
Quick approval: Some lenders, like Backd, can provide an approval decision within 24 hours.
Business Line of Credit Disadvantages
Lower borrowing amounts: This may not be the best option for a business who needs to borrow a very high amount. If you’re looking to borrow more than $750,000, you may need to try a different financing method.
Potentially higher rates: Because of the flexibility and easier approval, a business line of credit may come with higher interest rates than some other financing options.
Short repayment terms: Business lines of credit are great for short-term cash flow gaps but may not be suitable for projects that require longer repayment runways.
4. Working Capital Advance
A working capital advance is a flexible financing option that’s perfect for receiving quick funds. These loans can help you cover day-to-day expenses and bridge a cash flow gap from investing in business equipment, stocking inventory, or seasonality.
Working Capital Advance Advantages
Quick approval: Lenders often provide fast approval decisions. For example, with Backd, you can receive approval in as little as 24 hours.
Less stringent eligibility requirements: Traditional lenders’ requirements can make it difficult for small businesses to get funding. But working capital advance lenders have a straightforward eligibility process. For instance, Backd simply looks for U.S.-based businesses with a brick-and-mortar address that have been in business for one year, have $100,000 in monthly revenue, have a 625+ credit score, and established business credit.
Flexible terms: From repayment terms to the way the funds can be used, working capital advances are flexible financing options that are tailored to your business’s needs.
Working Capital Advance Disadvantages
Shorter repayment term lengths: This can actually be an advantage when used right. You just need to make sure you have a plan in place for repaying the advance, usually within 16 months at daily, weekly, or semi-monthly intervals.
Smaller borrowing amounts: You may be able to borrow a sizable amount with a working capital advance — Backd’s range from $10,000 to $2 million. But if you need an extra-large loan for something like a commercial real estate purchase, this isn’t the right option for you.
5. Business Overdraft
Business overdrafts are attached to your checking account. They allow you to withdraw more money than you have available. You only pay interest on the amount you’re overdrawn by, and like with credit cards and business lines of credit, paying back the overdraft frees that money up again to borrow.
You may already have an informal overdraft with your bank if they let payments through that you don’t have the money for at the time. But a formal overdraft gives you a set limit that you can overspend by together along with fixed fees and an interest rate. Formal overdraft charges are generally lower than informal fees.
Business Overdraft Advantages
Easy access: If you don’t have the balance in your checking account, you can still pay for goods and services without having to seek permission every time.
Spend-related interest: You only pay interest on the amount you’re overdrawn by, which means the overall cost of the debt is often much lower than a standard loan.
Fast turnaround: As you already have a checking account, banks have all they need to provide you with a quick answer to your request.
Business Overdraft Disadvantages
Unpredictable costs: If the Fed raises its rates and your bank follows suit, this will up your interest payments, which will increase your borrowing costs.
Low ceiling: The overdraft limit on your business bank account will likely be less than you could borrow with a loan or other funding options.
6. Merchant Cash Advances
Merchant cash advances (MCAs) are advances against your future credit card sales. The types of businesses that apply for MCAs are generally those that process a high number of credit card sales, like restaurants and retailers.
You’ll get the funds as an upfront lump sum. The lender then takes repayment from the card settlements you receive from your payment processor. Instead of paying an interest rate on what you borrow, you will pay a factor rate that could range from 1.1 to 1.5.
Merchant Cash Advance Advantages
Fast, simple application: You can apply for an MCA and receive the funds in as little as a week, so you get the cash you need fast.
Automatic repayments: Your lender takes a fixed percentage of your card settlements, meaning you don’t have to worry about sending repayments to them.
Option for those with bad credit: Borrowers with poor business or personal credit scores may have better chances of being approved than with other funding options.
Merchant Cash Advance Disadvantages
Prohibitively expensive: The factor rate (the charge for an MCA) may be as high as 1.5. That means you could be charged $50,000 to borrow $100,000, making the total repayment amount $150,000.
Tight repayment schedule: MCA terms vary between three and 15 months, so you don’t have very long to pay it back.
Potential doom loop: Very high fees and a short repayment window could result in a prolonged drop in revenues for companies with low profit margin.
7. Invoice Factoring
With invoice factoring (sometimes called “invoice financing” or “accounts receivables financing”), you sell your unpaid invoice to a factorer in return for immediate cash. They pay you up to 90% of the invoice value upfront. When your client pays, you receive the remainder minus the factorer’s fees.
Invoice Factoring Advantages
Quick payouts: You’ll receive the initial advance for each customer’s invoice normally within 24 hours of issuing it.
Easier approval: Your factorer sets individual limits for each of your clients based on their creditworthiness and not yours. That’s because, in essence, your client is actually borrowing the money.
Invoice Factoring Disadvantages
Impacted profitability: The fee you pay for each invoice you factor out will eat into the profit you make on each sale.
Customer discomfort: Some clients prefer to deal directly with their suppliers and may not feel comfortable having a finance company as an effective intermediary in their relationship with you.
Expensive clawbacks: If your customer doesn’t pay up, your factorer will expect the original advance back if you don’t have “non-recourse factoring.”
8. Crowdfunding
Crowdfunding platforms, like Kickstarter, allow firms to raise cash for their projects through multiple small contributions, often from private individuals. There is no guarantee that your project will receive sufficient backing, and in many cases, you’ll only receive the money if your project goal is fully funded.
Some crowdfunding platforms operate a loan model, where you repay your investors like you would with a standard financing facility. But with others, you can offer backers rewards or a small stake in your firm, or you can solicit for donations which you don’t have to repay.
Crowdfunding Advantages
Widespread validation: Proving demand in a business plan is difficult. On a crowdfunding platform, people validate your product or service with a contribution or donation.
Effective marketing: Along with building up a long list of investors and believers, your crowdfunders may also be your first wave of customers.
Full funding: You can ask for any amount you require, and you’ll receive it if your crowdfunding campaign is a success.
Crowdfunding Disadvantages
Intensive campaigning: Crowdfunding takes a lot of effort. You’ll improve your chances of being funded if you’re experienced at marketing, and you are persistent in your campaign.
Public failure: Everyone can see how your campaign is going. The market may not validate your idea, and a failed campaign may damage your company brand.
Opportunistic copycats: Someone who is better at fundraising may like your idea and co-opt it for themselves.
8 Sources of Funding You Can Approach for SBA Loan Alternatives
There are multiple funding options to choose from, including:
Traditional banks: Banks offer a wide range of financial products, but they set a high eligibility bar for borrowers, meaning securing an approval is harder.
Credit unions: They often have more achievable approval criteria than traditional banks, improving your chances of being approved.
Alternative lenders: Alternative lenders, like bridge loan lenders, are very flexible in the types of facilities and terms they offer, often working with borrowers with low credit scores.
Online lenders: Many alternative lenders are also online lenders, providing borrowers with fast approval loans and a simpler application process.
Peer-to-peer (P2P) lenders: Crowdfunding is a type of P2P lending, but there are other platforms offering finance products with more standard loans.
Community Development Financial Institutions (CDFIs): CDFIs provide loans to businesses in underserved communities and are a source of non-traditional financing options.
State and government: Many commerce departments offer a range of loans and business grants to companies within their jurisdictions.
Brokers: Brokers are intermediaries who match up lenders and borrowers. They guide borrowers through the application process and normally charge a fee.
Get an SBA Loan Alternative From Backd
If you can’t get the SBA 7(a) or SBA 504 loan you want, you’re not out of options. The best course of action is to find a lender who understands your company and offers you an affordable and fair small business financing solution.
You can apply with Backd for one of our two competitive lending options:
Business line of credit: Withdraw funds of up to $750,000 at great rates whenever you need capital.
Working capital advance: Borrow up to $2 million without needing collateral, with a repayment period of up to 16 months.
Apply now and be funded within as little as 24 hours.
