Alternative business loans offer flexible credit requirements, easy online applications, and quick access to funds for small business owners that don’t qualify for traditional financing. Alternative business funding encompasses several financing solutions, including short-term working capital, long-term equipment, inventory, and real estate financing.
Can you qualify for Payroll Protection Program Loans?
8 Alternative Business Funding Options
Loan Type | Best for | Provider |
|---|---|---|
Working capital shortages | ||
Minor business expansions | ||
Slow-to-pay customers | ||
Seasonal demand spikes | ||
High credit card receivables | ||
High-growth SaaS startups | ||
New or used equipment | ||
Short-term real estate financing |
1. Short-term Business Loans
Short-term business loans provide quick funding up to $500,000. They are easier to qualify for, can get funded more quickly, and have shorter repayment terms than term loans. Repayment terms for short-term business loans range from three to 36 months, and their annual percentage rates (APRs) range from 10% to 100%.
Who a Short-term Business Loan Is Right For
Short-term business loans are a good option for businesses with less than perfect credit, in need of money fast, and the ability to repay the loan quickly. You can often receive these loan funds in as soon as one business day to cover things like inventory needs or to make a seasonal payroll payment.
Short-term Business Loan Rates & Terms
- Loan amounts: $2,000 to $500,000
- Time to funding: As soon as one business day.
- Expected APR: 10% to 136%
- Origination fees: Up to 6%
- Repayment term: Three to 36 months
Repayment terms of short-term business funding can range from three to 36 months, although less than 12 months is typical. Loan amounts are generally up to $500,000, with annual percentage rates of 10% to 136%. Your lender will sometimes charge a loan origination fee of up to 6% of the loan amount.
Short-term Business Loan Qualifications
- Time in business: At least one year
- Annual business revenues: At least $25,000
- Credit score: At least 550
The qualification parameters for short-term small business loans are less restrictive than term loans. A lender will require that your business has been operational for a minimum of one year, you have at least $25,000 in annual revenues, and the owners’ personal credit scores are at least 550.
How to Apply for a Short-term Business Loan
The entire application process for a short-term business loan can occur online. Many lenders will connect with your business bank account or accounting software to speed up the approval process. You can often receive loan approval in a matter of minutes and receive loan funds in as soon as one business day.
Best Short-term Business Loans
2. Business Term Loans
Business term loans have repayment terms between one to five years and carry interest from 10% to 40% APR. These loans require a better credit score, higher revenues, and longer time in business than short-term loans. However, they also have lower APRs, longer repayment terms, and lower monthly payments.
Who a Term Loan Is Right For
If your business has grown past the startup phase, a term loan could be a great option. A term loan often has a lower APR and longer repayment term―one to five years―than a short-term business loan. These loans are a good way to finance equipment or growth capital for your business.
Term Loan Rates & Terms
- Loan amounts: Range from $5,000 to $500,000
- Time to funding: Takes about one week to fund
- Expected APR: 10% to 40%
- Origination fees: Up to 9%
- Repayment term: One to five years
Rates and terms for term loans vary. The general terms for these types of business loans include loan amounts up to $500,000, APR between 10% to 40%, and repayment terms of one to five years. The lender will probably charge an origination fee between up to 9%, and you can expect funding within one week.
Term Loan Qualifications
- Time in business: At least one year
- Annual business revenues: At least $25,000
- Credit score: At least 600
The standard qualifications required for a lender to consider you eligible for a term loan are that your business has been operational for at least one year, your annual revenues are $25,000 and higher, and you have a personal credit score of at least 600. These qualifications will vary depending on the lender you choose.
How to Apply for a Term Loan
Business owners can apply for a loan online through a lender’s website. You can prequalify for these loans in a matter of minutes and have the full application for the loan submitted in less than an hour. Approval occurs within two to three business days, and lenders usually make funding available within a week.
3. Invoice Factoring
Invoice factoring provides quick funding for businesses with business-to-business (B2B) or business-to-government (B2G) customer invoices. This financing option converts invoices due in 30, 60, or 90 days into immediate cash for your business, with roughly 80% of the invoice paid upfront. The remaining 20%―minus fees―is funded once the invoice is paid.
Who Invoice Factoring Is Right For
Invoice factoring can be a great option for businesses that have outstanding invoices with business-to-business (B2B) or business-to-government (B2G) customers and need immediate financing. It can also be a good solution for those business owners with less-than-perfect personal credit as invoice factoring relies more heavily on the creditworthiness of your customers than on your personal credit.
Invoice Factoring Rates & Terms
- Loan amounts: Up to $25 million, depending on the value of the sold invoices
- Discount rate: 0.25% to 0.7% per week
- Time to funding: Get funds in one to three business days
- Repayment term: 12 to 24 weeks, or as your customer repays invoices
Financing amounts vary based on the amount of the outstanding invoices that you include. A fee, called the discount rate, is charged on each invoice you finance and typically ranges from 0.25% to 0.7% per week. Repayment is fast on this financing option, and you can expect repayment terms of as quick as 12 weeks.
Invoice Factoring Qualifications
- Time in business: At least three months
- Invoices: B2B or B2G invoices due in less than 90 days
- Credit score: At least 530
Business qualifications for invoice factoring are minimal, making it a great alternative business funding option. You can qualify for invoice factoring if you have creditworthy B2B or B2G clients with outstanding invoices due in less than 90 days. Other minimum requirements vary for invoice factoring companies but, in general, three months of invoicing history and a 530 or higher personal credit score are recommended.
How to Apply for Invoice Factoring
Many invoice factoring companies will connect to your accounting system to analyze your outstanding invoices and determine which will qualify for potential financing. You then choose which invoices you’d like to include in the advance from the invoice factoring company. With invoice factoring, you can get funded in as soon as one business day.
Best Invoice Factoring Companies
4. Online Inventory Financing
Online inventory financing is a line of credit used to purchase inventory. The loan can be secured with existing inventory, inventory being purchased, or sometimes with other business assets. Inventory financing is cheaper than other short-term loan options, making it one of the best small business loans for retail businesses.
Who Online Inventory Financing Is Right For
Online inventory financing can be used for startup business loans to acquire inventory, or for retail businesses needing funding to increase their inventory. These loans can be used by retail or wholesale businesses looking to increase inventory amounts and may be used to purchase seasonal inventory to prepare for an upcoming busy period.
Online Inventory Financing Rates & Terms
- Loan amounts: Up to $500,000
- Time to funding: One week
- Cost of capital: 1.25% to 3% of advance for every 30 days of repayment
- Repayment term: One to six months
With online inventory financing, you may borrow up to $10 million and receive funds in as soon as one week. Online inventory financing lenders will charge you 1.25% to 3% of the outstanding loan amount for every 30 days that you are in repayment status. The average repayment term is one to six months.
Online Inventory Financing Qualifications
- Time in business: At least one year
- Business income: Positive
- Personal credit: At least two years of personal credit history
The qualification requirements for online inventory lenders are not always clear. However, in most cases, you will need to be in business for at least one year and have positive business income. Besides that, have a personal credit history with at least two years of account activity and reporting.
How to Apply for Online Inventory Financing
Business owners can complete an inventory financing application online via the lender’s website―some lenders may require additional account setup―within minutes and can be approved in as soon as one business day. There are no formal requirements beyond the normal personal and business information provided to the lender in the application.
Best Inventory Financing Options
5. Merchant Cash Advances
Merchant cash advances (MCAs) are not small business loans but are advances on your business’s future credit card receipts. The merchant cash advance provider issues you an advance and collects a percentage of your daily credit card receipts as repayment. This can be an expensive form of financing. However, it can get you funded quickly.
Who Merchant Cash Advances Are Right For
While merchant cash advances are an expensive option for business financing, they can be useful for some businesses. MCAs are often used by small businesses that could not find other short-term financing, need faster funding than they could get through a working capital loan, or don’t meet the qualifications for United States Small Business Administration (SBA) Express loans.
Merchant Cash Advance Rates & Terms
- Loan amounts: Most providers will lend 85% to 250% of your monthly credit card sales volume
- Time to funding: One to three business days
- Factor rate: 1.2 to 1.5 times
- Holdback percentage: 8% to 30%
Merchant cash advances are an expensive short-term financing option. The costs associated with a merchant cash advance largely depend on the following factors: the amount of the advance that you need, the factor rate charged by the provider on the amount advanced to you, and the daily holdback percentage of your daily credit card receipts.
Merchant Cash Advance Qualifications
- Annual credit card sales: At least $36,000
- Time accepting credit card payments: At least six months
- Credit score: At least 500
- Additional requirements: Active credit card processor account
The qualifications for merchant cash advances are minimal compared to conventional business loans and alternative loans. While requirements vary by provider, typical qualifications for merchant cash advances are $36,000 or more annual credit sales, a history of accepting credit card payments with a credit card processor account, and a credit score of at least 500.
How to Apply for a Merchant Cash Advance
The merchant cash advance application is as short as one to two pages, is straightforward, and can be completed online. After submitting your application, you will be asked to provide additional information regarding your credit card sales and business finances. Approval is fast, and you can receive funding within two to five days.
Best Merchant Cash Advance Providers
6. Revenue-based Financing
Revenue-based financing is an alternative business loan where payments are calculated as a percentage of your revenue instead of as a fixed amount. Revenue-based loans are often the best small business loans for businesses with high growth margins because they provide growth capital now for a percentage of your future revenue.
Who Revenue-based Financing Is Right For
Revenue-based financing is for high growth businesses with 50% or more margins, like software-as-a-service (SaaS) companies. Most times, your business will need to have a subscription-based revenue model or a steady and predictable recurring income stream. This type of small business lending is often used as an alternative to seeking venture capital or equity investors.
Revenue-based Financing Rates & Terms
- Loan amounts: $50,000 to $3 million, but not over three times to six times your monthly revenue
- Total cost of capital: 1.3 to three times
- Repayment: Monthly payments based on a fixed percentage of your monthly revenue (3% to 8%)
- Time to funding: Takes three to four weeks
With revenue-based financing, you can borrow between $50,000 to $3 million, but not more than three to six times your monthly revenue. The total cost of capital will be between 1.3 to three times the amount borrowed, and the repayment term is undefined as payment will be based on a fixed percentage of your monthly revenue.
Revenue-based Financing Qualifications
- Monthly revenue: At least $15,000
- Gross profit margin: At least 50%
- Predictable revenue: Subscription-based or other recurring monthly revenue
The basic qualifications for revenue-based financing are different from other alternative business loans. To be eligible, you must generate revenue of at least $15,000 to $30,000 per month. You can qualify if your gross margins are at least 50%, and you have predictable recurring revenue like customer subscriptions.
How to Apply for Revenue-based Financing
The online application can be completed within minutes. You will speak with a representative by phone to review your funding needs. The provider will connect to your bank accounts to analyze bank statements and verify your revenue. Once verified, your loan application goes to underwriting to determine total loan amounts and initial repayment terms.
Best Revenue-based Financing Options
7. Equipment Financing
Equipment financing can be used to purchase equipment, vehicles, or machinery. The minimum credit score requirement for equipment financing can be much lower than for term business loans with a similar term. Equipment financing can be structured as an equipment lease instead of a loan, which can give you added flexibility in your monthly payments.
Who Equipment Financing Is Right For
Equipment financing is a good option for businesses needing to purchase equipment, vehicles, or machinery. It can be utilized as startup business loans for equipment purchase because the equipment serves as collateral. Equipment financing can also be useful for businesses wanting to claim equipment depreciation on their business tax returns.
Equipment Financing Rates & Terms
- Loan amount: Up to $1 million
- Interest rate: Starting at 6%
- Repayment term: Two to five years
- Down payment: 0% to 20%
- Time to funding: Typically less than one week
With equipment financing, you can get a loan of up to $1 million to purchase vehicles, equipment, or machinery for your business. These loans are made at interest rates starting at 6%, with repayment terms between two and five years. You can typically receive funding in one week but be prepared to make a down payment on your equipment.
Equipment Financing Qualifications
- Proof of business existence: Lender will require documentation that you are operating a legal business
- Loan purpose: Loan proceeds must purchase equipment, vehicles, or machinery
- Credit score: At least 620
The qualification requirements for equipment financing are less stringent than some other alternative business loans because they secure it with the equipment as collateral. To qualify, you must have a credit score of at least 620, be able to show proof of your business’s existence, and use the loan proceeds for equipment, vehicles, or machinery.
How to Apply for Equipment Financing
Applying for equipment financing can often be done online. Once preapproved, the lender will determine how much it can be lent to you based on your credit, company history, and how well the equipment holds value.
Best Equipment Financing Companies
8. Hard Money Loans for Small Businesses
A hard money loan can help real estate investors buy residential or commercial real estate. It can also obtain working capital for a business by using your personal or commercial real estate as collateral to back the loan. Hard money loans have short repayment periods and can be expensive.
Who Hard Money Loans Are Right For
Hard money loans work well for borrowers who have real estate assets that they can leverage as collateral but may not qualify for a traditional loan. Hard money loans allow you to draw equity off your real estate, which can fund other business needs as you wait for your property to sell.
Hard Money Loan Rates & Terms
- Loan amounts: Generally up to 75% loan-to-value (LTV)
- Time to funding: 15 to 30 days
- Interest rates: 5% to 13%
- Loan term: One to three years
- Origination fees: 1.5% to 10%
- Closing costs: 2% to 5%
With a hard money loan, you can borrow up to 75% of the value of the property. Interest rates vary from 5% to 13%, and lenders charge a loan origination fee of 1.5% to 10%. Because these loans are used to purchase real estate, you should also be prepared to pay closing costs of 2% to 5%.
Hard Money Loan Qualifications
- Credit score: At least 550
- Debt-to-income ratio: Less than 35%
- Real estate experience: May be required by your lender
To qualify for a hard money loan, you must have a credit score of at least 550 with no recent foreclosures or bankruptcies. Plus, your debt-to-income ratio must be less than 35%. Your lender may also require you to have prior real estate experience, illustrating you know the process of real estate sales.
How to Apply for a Hard Money Loan
In most cases, you can begin the application process online via your lender’s website. After you fill out an application and provide the necessary documentation, the lender will order a property appraisal to determine the amount of the loan you are eligible for based on the property’s value. The approval process typically takes two to three weeks.
Pros & Cons of Alternative Business Loans
An alternative business loan is available to borrowers with lower minimum qualifications than those required by online lenders. It also encompasses a wide range of funding options that are all available in less than a week. However, it has higher overall costs, shorter repayment terms, and funds for smaller amounts than a traditional loan from a bank.
Pros of Alternative Business Loans
- Can get you funded quickly and has a simple application
- Have lower overall minimum requirements than traditional financing
- Offer many types of financing to businesses
Cons of Alternative Business Loans
- Have higher overall costs than traditional funding options
- Require quick repayment
- Provide smaller amounts of funding than traditional lenders
If your business needs fast funding or you cannot meet the minimum qualifications required by a traditional lender, then an alternative business loan is your best option. However, if you need longer repayment terms or want the lowest overall costs for your financing, we recommend working with a traditional lender or exploring additional alternatives.
Bottom Line
Alternative business loans can be a great option when traditional lenders can’t lend to you or can’t get you the funds quickly enough. It can also be a good option if you’re looking for a simpler application process and willing to pay a little extra for the convenience.
Submit Your Comment
You must be logged in to comment. Click a "Log in" button below to connect instantly and comment.