Alternative Lenders for Small Businesses: What’s Your Best Option?

Small businesses are the backbone of the American economy. In fact, according to the U.S. Small Business Association, businesses with 500 employees or fewer comprise 99.9% of all American businesses, and those with paid staff make up 99.7% of firms.

Small businesses are critical to the U.S. economy, which means that providing them access to capital is critical as well. Beyond banks and credit unions, there is a wealth of alternative lenders who can provide access to funds quickly and sometimes with fewer requirements than traditional banks.

Similar to how just one grocery store doesn’t meet all of a family’s shopping needs, it’s common for small businesses to also have different capital needs that are met by a combination of banks, credit unions and alternative lenders. Each option comes with its own trade-off and, based on the needs of a business, one solution may work best today and another tomorrow. To use a common phrase, it takes a village to support businesses, their owners and, by extension, the people they employ.

This blog post will explain what an alternative lender is, and outline the various types of loans offered. We’ll also discuss some best practices when selecting a provider.

What is an alternative lender?

An alternative lender is a type of financial institution that provides loans to businesses, typically those with smaller operations. Unlike traditional banks, they usually have fewer requirements and provide more flexible terms.

Sometimes called online or “fintech” lending, alternative lenders are essentially any non-bank lender. Many operate completely online, taking advantage of technology-first underwriting to speed up the process and provide greater access to credit. Thus, alternative lenders typically employ more flexible qualification requirements, take less time to process applications and can more quickly provide funding than bank lenders. On the flip side, alternative lenders often charge higher interest rates and offer shorter repayment terms.

Alternative lenders fill a critical need in today’s economy, as they can provide much-needed capital to small business owners. Many clients who access capital from an alternative lender are really “alternating” priorities by trading higher rates and fees for increased speed and efficiency (often providing approvals and funding within days). Whereas traditional loans tend to be slower, but offer lower rates and fewer fees. 

Types of Alternative Lenders

There are three main types of alternative channels: direct lenders, crowdfunding, and marketplace or peer-to-peer lenders. We explain each below.

Direct Lenders

Direct lenders provide businesses with direct access to capital. These are typically online lenders that offer small business lines of credit, term loans or other financing products. The approval process is usually quick and simple, although the interest rate will vary depending on the lender.

Crowdfunding

Crowdfunding is a relatively new form of financing that relies on large numbers of people investing small amounts of money in a business or project. Platforms such as Kickstarter, Indigogo and GoFundMe allow businesses to crowdsource funding from the public.

Marketplace or Peer-to-Peer Lenders

These lenders serve as a marketplace for borrowers and investors. They match up borrowers with potential investors who are willing to finance their projects or companies. The approval process timeline is unique to each business and depends on the size of the request and, oftentimes, the persuasiveness of that request.

Types of Alternative Loans for Small Businesses

The types of non-bank small business lenders vary widely, but here are some of the most common:

Short-term Business Loans

Short-term business loans are typically offered for a period of one year or less with relatively small amounts of capital. These loans can be an effective way to access working capital for immediate use.

Merchant Cash Advances

A merchant cash advance is an alternative form of financing that allows a business to receive an advance on its future receivables. Essentially, you receive an up-front lump sum, but instead of making one fixed payment each month, you make payments by either withholding a percentage of your sales daily or via fixed weekly or monthly withdrawals from your bank. 

Keep in mind that this type of borrowing often comes with some of the highest costs, potentially as high as 350%. Plus, making more frequent repayments can negatively impact your cash flow.

Microloans

A microloan is a small, term loan typically offered for amounts of up to $50,000. Terms can vary from short to long, commonly anywhere from six months to five or seven years, depending on the lender. These loans are ideal for businesses that need a small amount of money to start out or grow their business.

Lines of Credit

A line of credit is a form of revolving financing that allows businesses to borrow money as needed up to a certain limit. This type of loan can benefit businesses that need access to capital quickly. Similar to consumers using credit cards, businesses use credit cards or lines of credit.

It’s important to keep in mind that credit cards and lines of credit should be paid in full monthly to avoid paying interest and additional fees, and is thus more ideally suited to smaller expenses. (Larger expenses, like equipment, are better financed through longer-term loans.)

Installment Loans (A.K.A. Term Loans)

An installment loan is a type of loan that is repaid in fixed monthly payments over a specific period. This type of loan can be used for larger expenses up to $500,000, for things like working capital, repayment of another debt, or to provide capital access while waiting on another, possibly larger, loan to process.

Bridge Loans

A bridge loan is a short-term loan that can be used to cover the gap between two larger financing rounds. This loan type allows businesses to access capital quickly without having to wait for a longer-term loan.

Equipment Financing

Equipment financing enables businesses to purchase equipment or machinery. This is typically offered in the form of an installment loan and can be an effective way to acquire the equipment necessary for business operations.

The Benefits of Alternative Lenders

Alternative lenders can be a great way for small businesses to access capital quickly and easily. Here’s a closer look at some of the benefits:

Faster Application Process

Alternative lenders generally offer a much quicker application process than banks or credit unions, as they often don’t require the same level of paperwork or financial documentation. This makes it easier for small businesses to get approved and access capital quickly, anywhere from 24 hours to a few days, rather than weeks or months.

Less Paperwork

Alternative lending is often seen as more accessible because lenders typically require less paperwork and ask fewer questions. By taking advantage of technology that streamlines the application and approval process, alternative lenders are able to process loan decisions with less documentation and in faster time.

Is an Alternative Lender the Best Option for My Business?

Yes, it may be. With faster application processes and quicker turnaround times, alternative lenders can provide a much-needed source of working capital for businesses.

Online lenders and crowdfunding platforms are also becoming increasingly popular options. These alternative funding sources offer a variety of financing solutions, such as small business loans, lines of credit, or even donations from individuals.

Before deciding on an alternative lender, it’s important to research all your options and understand the terms and conditions of each loan type. Ultimately, the type of alternative lending platform will depend on your needs and circumstances.

LendThrive Can Help You Grow Your Business

LendThrive is an alternative lender that offers fixed-rate business loans to small business owners. We work with businesses of all sizes, offering loan amounts of up to $150,000 in as fast as 24 hours. Apply online and get approved within minutes.

To qualify, you need at least $10,000 in sales monthly, have been in business for two years minimum, and have an active bank account. Learn more about the loan terms and requirements on our website.

LendThrive can provide an excellent source of working capital for small business owners. With competitive terms and a speedy approval process, we offer a great solution for those that need the funds now.

Apply today and start growing your operations!