Alternative Financing for Small Business: What are Your Options

Alternative financing solutions for small businesses are helpful because not every loan product is the right fit for your business. If you aren’t sold on the traditional business loan opportunities out there, then exploring all of the alternative funding sources for small businesses is worthwhile.

Pro Advice:
Shop Around: It’s challenging for small businesses to get loans from traditional lenders. The difficulty often lies in a high bar for business experience and credit requirements.
Think Outside the Box: Unconventional option could be just what you need to get your business off the ground like crowdfunding.
Be Open Minded: The right financing option could completely transform your business.

Alternative Small Business Financing vs Traditional Financing

Alternative small business financing solutions are available because traditional financing options aren’t the right fit for all businesses. Here’s a closer look at the differences:

Credit requirements: Traditional financing often requires a stellar credit score. But some alternative financing solutions don’t consider credit at all.
Time in business: Most traditional lenders will only consider lending to businesses that have been open for at least two years. But alternative financing options can help open the doors of your business.
Repayment terms: Traditional loans often come with a set monthly payment for an extended period. Alternative funding solutions have various repayment structures that could better suit your business.
Funding speed: The process of obtaining a loan through a traditional bank often takes weeks. But with many alternative funding solutions, you can obtain the funds you need in just a few days.

Types of Alternative Financing for Small Business

If you are seeking an alternative financing solution for your small business, check out the extensive list of options below.

Lines of Credit

A line of credit from an alternative lender might be a good fit if you have various funding needs. The loan structure is similar to a credit card in that you can withdraw what you need, up to the limit, when you need it. But generally, lines of credit offer lower interest rates than a credit card.

Logistics: A business line of credit is a revolving credit account with ample flexibility. After you withdraw funds, your monthly payment amount is adjusted to reflect your borrowing.
Common uses: Cover expenses, growth opportunities, payroll, inventory purchases, and more.
Where is this available? FundBox, BlueVine, Credibly, Rapid Finance, OnDeck, and more.

Online Loans

Online small business loans might seem like a traditional financing option. But if the loan isn’t coming from a big bank, it still counts as an alternative solution. That’s because the requirements for funding are typically less stringent than those set by traditional lenders.

Logistics: The details of an online loan will vary dramatically by the lender. Although the eligibility requirements are usually less stringent, you may or may not be required to put up collateral. Be prepared to pay a higher interest rate than you would through a traditional bank.
Common uses: Cover expenses, payroll, inventory purchases, and more.
Where is this available? FundBox, Biz2credit, Fundera, Fora Financial, and more.

Term Loans

A term loan is often called an installment loan. Although you can obtain term loans from traditional banks, you can also find them through online lenders.

Logistics: Term loans have a set repayment period. If you have a fixed interest rate, you’ll make monthly repayments for the duration of the loan term.
Common uses: Cover expenses, payroll, inventory purchases, equipment purchases, and more.
Where is this available? FundBox, Biz2credit, Fundera, Fora Financial, and more.

Short-Term Loans

Sometimes business owners just need a quick influx of cash. If you can repay the loan in less than a year, that’s generally considered a short-term loan.

Logistics: The best short-term loans have a set repayment period, which is often shorter than one year.
Common uses: Cover a one-time cost or a necessary influx of working capital.
Where is this available? FundBox, Fora Financial, and more

Best Short Term Loans for Small Business

Merchant Cash Advances

A merchant cash advance is not a loan. Instead, you’ll receive an advance of cash based on the business’ credit and debit card sales. In most cases, a merchant cash advance is more expensive than other funding options.

Logistics: After accepting the advance, you’ll repay the advance by giving the advance company an agreed-upon percentage of your sales. Although there is no set repayment deadline, the costs can quickly cut into your cash flow.
Common uses: Cover a one-time cost or provide a fast influx of needed capital.
Where is this available? FundBox, Fundera, Rapid Finance, Lendio, and more. Check out the best merchant cash advance options on our list.

Personal Loans

A personal loan is tied to your personal credit details. But there’s no rule that stops you from using these funds for your business expenses.

Logistics: You’ll apply for a personal loan as an individual. After you receive the funds, you will make regular payments for the loan term.
Common uses: Cover any number of personal expenses. If you are a business owner, you might use a personal loan to cover a major business expense. Or even use the funds to get your business off the grounds.
Where is this available? LightStream, Upstart, Best Egg, OneMain Financial, and more. Explore the best personal loan options on our list.

Business Credit Cards

Business credit cards offer a flexible funding solution that you can tap into at any time. The flexibility can come in handy when unexpected cash flow crunches come your way.

Logistics: You can use a credit card to make purchases, up to the limit. After you make purchases, the minimum payment will adjust based on your balance.
Common uses: Purchase supplies and cover expenses for the business.
Where is this available? You can find business credit cards at almost every bank and credit union.

Microloans

When compared to other lending options, microlending offers access to smaller amounts of money that can make a big difference for business owners.

Logistics: The average microloan amount is $13,000. Many non-profits work to provide microloans to underserved communities.
Common uses: Purchase equipment, obtain supplies, and serve as working capital.
Where is this available? SBA microloan program, USDA microloan program, community development organizations, and more.

Crowdfunding

Crowdfunding involves raising the funds you need from potential customers online.

Logistics: The most common way to crowdfund a business expense is to offer backers a reward in exchange for the donation.
Common uses: Fund inventory purchases for a potentially popular product.
Where is this available? GoFundMe, Indiegogo, Kickstarter, Pateron, and more.

SBA Loans

SBA loans are insured through the U.S. Small Business Administration. The insurance provided gives lenders more security when making potentially risky loans.

Logistics: There are several SBA loan types out there. Depending on your needs, you could borrow up to $5 million. The relatively low interest rates of the SBA loans make this an attractive option.
Common uses: Purchase equipment, cover payroll, obtain supplies, and serve as working capital.
Where is this available? Lendio, Fundera, Kapitus, and more.

Invoice Factoring

If you have outstanding invoices, you can sell these to a lender in exchange for a cash advance.

Logistics: Invoice factoring involves selling an unpaid invoice owed to your business. Once sold, the buyer will collect the proceeds of the invoice.
Common uses: Fast influx of cash for any business need.
Where is this available? Fundera, Lendio, Kapitus, and more.

Invoice Financing

Invoice financing is a bit different than invoice factoring. Instead of selling the invoice outright, it serves as collateral for the loan.

Logistics: A lender will grant you a line of credit based on the size of your outstanding invoices.
Common uses: Fast influx of cash for any business need.
Where is this available? Fundera, Lendio, Kapitus, and more.

Equipment Financing

Equipment financing allows you to spread out the cost of a necessary component of your business.

Logistics: The loan cost covers a major equipment expense, which you repay at regular intervals.
Common uses: Cover major equipment purchases such as a work vehicle or factory equipment.
Where is this available? Credibly, Fora Financial, FundBox, Fundera, and more.

Business Grants

Business grants are an excellent option for small business owners.
Logistics: Although you will have to submit an extensive application, you won’t have to repay any business grants you receive.
Common uses: Expanding an existing business or opening a new business.
Where is this available? Grants.gov, USDA, Business USA, and more.

Peer-to-Peer Lending

Peer-to-peer lending is an option for bad credit borrowers that comes with quick decisions.

Logistics: You submit a loan application through a peer-to-peer lending platform. If you are matched with a lender that grants the loan, you’ll make regular monthly payments.
Common uses: Expanding an existing business or opening a new business.
Where is this available? Prosper, Upstart, and Funding Circle.

Venture Capitalists

Venture capitalists offer more than money to small business owners. They can also offer technical knowledge, managerial experience, and more.

Logistics: Venture capital funding comes with professional guidance towards a shared goal of success.
Common uses: Grow a new or existing business.
Where is this available? Most VC firms focus on a particular industry, find out which ones might be interested in working with you.

Angel Investors

Angel investors are wealthy individuals that look for investment opportunities in new or growing companies.

Logistics: An angel investor will typically request a share of business profits in the form of equity or a portion of the revenue.
Common uses: Grow a new or existing business.
Where is this available? MicroVentures, FundingPost, Angel Messenger Forum.

Pitch Competitions

A pitch competition offers a grand prize of funding to the winner. Although the business will need to meet specific criteria, it’s a great opportunity to network and potentially win capital.

Logistics: The pitch requirements will vary based on the competition. If you win, you won’t be required to repay the funds.
Common uses: Grow a new or existing business.
Where is this available? U-Pitch, TechCrunch Disrupt, The Alconics Awards

Partner Financing

A strategic partner can make all the difference for your business.

Logistics: Usually, this deal is structured as a lump sum in exchange for some of the business equity.
Common uses: Grow an existing business.
Where is this available? You’ll need to find an investor who’s interested in what the business has to offer.

Convertible Debt

An investor can choose to structure their offer as convertible debt.

Logistics: You borrow funds from an investor. If the business meets certain criteria laid out in a contract, then the debt will convert into an agreed-upon amount of equity.
Common uses: Grow a new or existing business.
Where is this available? An individual investor can set up a convertible debt deal.

Bootstrapping

Bootstrapping involves building a business without too much external capital.

Logistics: You tackle all of the business funding needs on your own without taking on debt or bringing in an investor.
Common uses: Cover all business needs without outside funding.
Where is this available? Although this option is easier said than done, many entrepreneurs go this route to maintain control. Consider starting other businesses, like selling a service, to fund your main business goals.

Pros and Cons of Alternative Financing for Small Business

The list above proves there is no shortage of alternative financing solutions. But there are some advantages and disadvantages to consider with these options.

Pros of Alternative Small Business Financing

Diversity of options: You can find the right financing solution for your business needs.
Speedy application: Many alternative funding solutions have less stringent application requirements.
Fast funding: Most alternative financing options offer faster funding decisions.
Flexible requirements: If you don’t have great credit or an extensive track record, you can still find alternative funding options.
Some repayment-free options: In some cases, you can avoid repaying the funds altogether.

Cons of Alternative Small Business Financing

Costs: Some alternative funding solutions come with higher interest rates and fees than traditional funding options.
Short loan terms: Generally, you’ll need to repay the loan more quickly.
Smaller loan amounts: Many alternative lenders offer smaller loan amounts.

Is Alternative Financing Right for My Small Business?

Traditional lenders have relatively stringent requirements. If your business doesn’t meet those high standards, then alternative financing is an option to consider.

You are a new business owner: Without a track record of success, most traditional lenders will deny your application.
You have a bad credit score: Although bad credit isn’t a roadblock for alternative lenders, it can be a dealbreaker for traditional lenders.
You have a solid business plan: If you have a business plan to follow, you’ll know exactly how much you want to borrow. Plus, confirm that the business can support the loan costs.

How to Apply for Alternative Small Business Financing

The application process for small business financing varies. But here are some steps you can take to prepare.

Write a business plan: A business plan outlines what you want to achieve with your business and how you will get there.
Do market research: Market research can help you uncover what types of loans businesses are obtaining in your industry.
Run the numbers: Determine exactly how much you want to borrow. If you aren’t sure exactly what the costs are, then consider a line of credit option.
Check your credit: Understanding where your credit score stands can help you narrow down your loan options. A good credit score will open more doors. But funding is still possible with a bad credit score.
Explore the options: After a thorough look at alternative lending options, apply for the right choice with confidence.

FAQs about Alternative Financing for Small Business

You have questions and we have answers about alternative financing for small businesses.