Small Business Alternative Financing

2022-02-11

Minyang Jiang

 

Table of Contents

 

Small businesses often have to get creative to secure proper financing, and that’s where alternatives to business loans come in. In June 2021, a mere 13.6% of small business loan applications were accepted by big banks. It’s easy to see why many small business owners have become frustrated with traditional bank loans.

Loans guaranteed by the Small Business Administration (SBA) are usually a small business owner’s first thought. These traditional loans tend to feature great terms, low interest, and high funding limits, but as we know, these SBA loans can be quite difficult to get approved for.

Even applying for one requires undergoing a lengthy application process that leaves you with few options in the interim (nor do you have certainty that you’ll be approved for funding). 

Fortunately, SBA loans aren’t your only option. Alternative financing options are available for small business owners interested in a non-traditional approach.

Why You Should Consider Alternative Business Lending 

There are plenty of reasons why a small business may seek out alternative business funding. Maybe a poor credit score has made it difficult to secure a small business loan from a traditional lender. Or maybe the business owner simply needs a quick cash infusion that can’t be gained from an extensive loan process.

 

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Types of Alternative Funding For Small Businesses

Whatever the reason, there are plenty of alternative business lending options out there for those who know how to find them:

  • Microfinance loans
  • Business cash advances
  • Business lines of credit
  • Private/P2P lending
  • Invoice factoring
  • Working capital loans

Different options have different advantages, so let’s review a few that every small business owner should know about.

1. Microfinancing

Similar to a traditional bank loan, microfinancing offers funding to small businesses in need, only on a smaller scale. So-called “microloans” usually range from $5,000 to $50,000, often featuring a faster approval process and a flexible repayment term, ideal for small businesses and startups. (In 2020, 30% of all SBA-issued microloans went to startups.)

It’s an easy way to secure fast funding when compared with traditional banking, but it has a few drawbacks. As microloans are smaller, they’re less able to fund big-ticket purchases or large-scale business transformations. 

They’re also subject to many of the same qualifications as larger loans, so businesses with poor credit, fluctuating revenue, or lacking collateral may still struggle to get what they need.

2. Merchant Cash Advances

Alternative Financing For Small Business

This alternative business financing strategy, in essence, allows business owners to sell the purchase of future receivables to lenders. In exchange for a cash advance, the business agrees to sell percentages of future sales.

This is an effective alternative business financing option due to the way you can make flexible remittances. As lenders generate proceeds from the business’s sales, lenders tend to base approval on the strength of the business rather than your personal credit score. This makes MCAs a great alternative to business loans.

3. Business Line of Credit

A common alternative business lending strategy is leveraging specific lines of credit for business use. Business lines of credit tend to have high limits and lower interest rates compared to business credit cards, making them favorable choices for businesses that need flexibility in their budget for investing in growth initiatives, small business marketing, and so on.

Naturally, with such favorable terms, business lines of credit can be difficult to acquire. Your lender will discuss options with you, including putting down assets as collateral, to find credit options that meet your needs.

4. Peer-to-Peer (P2P) Lending

P2P lending is performed through online platforms/marketplaces, connecting small business owners with investors who have the capital to spare.

As an alternative financing option, P2P lending lets borrowers avoid the hassle of dealing with banks and supports flexibility in borrowing arrangements. With no regulated financial institution involved, borrowers and lenders are free to set their own terms.

While this can create attractive lending arrangements, the other side to this coin is that borrowers may have fewer protections than when dealing with professional lenders. Keep these issues in mind as you consider P2P lending as an alternative to business loans.

5. Invoice Factoring

While technically considered an asset purchase, invoice factoring involves working with a lender to pay a percentage of outstanding invoices, giving businesses a way to maintain cash flow when vendors come up short.

Other options under this umbrella include invoice financing, where business owners can receive funding through unpaid invoices, or invoice discounting, where the business receives part of the invoice, with the full total (including interest) repaid later.

Each of these options offers a viable way to manage unpaid invoices, so if delinquent customers are a concern, this can be a great alternative to small business loans.

6. Working Capital Loans

Finding alternative financing for your small business doesn’t mean avoiding loans altogether. Working capital loans are a non-traditional way to acquire fast financing, These loans are used to cover day-to-day and operational expenses.

In terms of alternative funding for small businesses, working capital loans can add much-needed flexibility during low cash flow periods. Businesses with seasonal products, for example, may benefit from a working capital loan during the off-season.

However, bear in mind you’ll have to make fixed monthly installments with these, so you need to be confident that your business can keep up with payments.

Consider Alternative Lenders For Small Business Success

Alternative Lenders For Small Business

There is no single best alternative to business loans. There are many options available, each with its own benefits and requirements. The question isn’t whether to consider alternative funding for your small business, it’s knowing what options are available and how to vet potential lenders before buying in. That’s where we come in.

At Credibly, we have years of experience helping businesses like yours unleash their true potential. Unlike traditional banks, we don’t make you jump through hoops endlessly—we help you get funding and start growing today.

Alternative Financing Options For Small Businesses You’ll Want to Swipe Right On

Right-sized financing at the right time—that’s how we help small businesses like yours grow, not owe.

Talk to a loan expert and find out which financing options are right for you.

Speak To a Alternative Financing Expert