Small Business

Alternative Loans for Small Businesses

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US businesses, especially smaller ones, may have a problem.

Increasingly, America’s entrepreneur class is having trouble getting the financing they need to keep the lights on and keep revenues rolling in. Enter alternative lending as — well, an alternative — to traditional loans or self-financing.

What are Alternative Loans?

Alternative loans cover a broad array of business loan options available to startups and existing businesses that fall outside of a traditional bank loan. Alternative loans are in demand for one major reason — increasingly, company decision-makers cannot obtain a traditional bank loan. As larger financial institutions have slowed the lending spigots in the years following the Great Recession, many small businesses are labeled as lending risks.

Alternative lenders have stepped into the breach and cater directly to small business owners. These lenders can consider often overlooked sources of collateral, like real estate, future revenues, or outstanding client invoices to secure the loan.

To provide a more appealing option to small businesses, alternative lenders are usually more flexible than larger financial institutions on loan repayments (many offer flexible schedules, for example) and often green light loan approvals much faster than banks, sometimes within 24-48 hours of the loan application. With speed, convenience, and flexibility as selling points, alternative loans are among the fastest-growing financial tools available today for small businesses.

How to Get Started

The first thing you need to know is what options are available and when to best utilize each. Entrepreneur magazine outlined four different situations in which alternative lending might be the right option for your company:

In each of these cases, you should have a clear understanding of your business goals, how the money will be used, and the terms for each of your loan possibilities.

Types of Alternative Lending

“Which type of alternative financing may be best for me?”

To help answer that query, here’s a look at some of the most popular types of alternative lending below:

Online lending

Primarily, there are two types of online lending that show major signs of stability and growth—peer-to-peer lending and online, platform-based business lending.

Peer-to-Peer (P2P)

Peer-to-peer lending rolled out in 2005 as a solution to a vexing problem for business borrowers: “Where can I get a loan if a bank won’t give me one?” A decade later, P2P hit its stride, and some lending industry analysts estimate the market will grow to more than $558 billion by 2027. What makes P2P unique is that it eliminates the middleman (lending institutions) by putting borrowers in direct contact with potential investors through an online lending platform. Here, investors can offer borrowers a lump sum of cash in exchange for a share of future transactions or sales. What’s also appealing about P2P lending is that funding and payment transactions can be conducted automatically online, making it a relatively easy and painless process.

Merchant Cash Advance (MCA)

For business owners who can’t get a traditional loan, and who may have less than stellar credit, a merchant cash advance is another route to alternative financing. An MCA is not a loan. Instead, this form of funding is deemed as the sale of a company’s future credit sales at a discount. By and large, merchant cash advances are short-term (usually 90 days or so). Regular payments are made by the borrower, usually straight from the company’s bank account or from a fixed percentage from each company sale after payment is made by the customer. The good news for MCA borrowers is that credit can be approved quickly, without the onerous and volume-heavy paperwork associated with traditional bank small business loans. The downside is that interest rates linked to such loans can be heavy, with many MCA rates over 20%.


Small business factoring is cited by many industry observers as the “smart alternative” to bank loans. Just like MCAs, factoring can be a viable option for small business owners, as factoring financing approvals aren’t based on the business owner’s credit health, but rather, on the company’s clients’ credit health. Factor financing is also good for small firms facing a cash-flow crunch or slow-paying clients. With factoring, businesses can sell their customer invoices to “factor companies,” that, after approving the deal and weighing the client’s credit, will deliver up-front payments against client invoices and account receivables, of up to 90% of the total amount owed by the customer. After the client makes the total payment owed, the factoring company remits the balance, and tags on a processing fee.

For business owners, with a major benefit to factoring is payment times—instead of waiting the typical 30-to-60 days to get paid by customers, small business owners get access to cash within 48 hours. As with MCAs, interest rates linked to factoring are generally higher than bank loans. Still, factoring is proving popular with businesses. The Wall Street Journal estimates the size of the factoring market is in the billions, although much of those assets are tied to specific industries, like trucking, retail, construction, and health care.


Crowdfunding is another increasingly viable and popular option for small business owners seeking alternative forms of financing. However, it can take some time to raise funds, as the average, single “donation” is only $88. However, if you get enough donations over time, the funds can add up to a pretty sizable amount.

Unlike peer-to-peer lending, crowdfunding does not require that you have to pay the money back– at least not in the literal sense. With crowdfunding campaigns, companies often reward donors with perks, like future discounts or company swag. People who donate to the fund are typically passionate about the business idea and want to see it get off the ground for myriad reasons. The most successful crowdfunding timelines are between 30 and 39 days. Any less, and you many not reach maximum asset volume potential. Any more, and you’re risking oversaturating the market by running a stale funding campaign.

Revenue-Based Financing (RBF)

What if small business owners could raise capital by promising investors a future, set percentage of revenues? That’s the promise behind revenue-based loans. Basically, revenue-based financing (RBF) is another method of raising capital through investors, but what makes it different from other forms of investor-based financing, like peer-to-peer funding, is that investors provide cash up front in exchange for a percentage of the company’s revenues over time. So, unlike a traditional loan, there is no interest to pay and there are no fixed payments. In fact, investor payments are directly proportional to your company’s success.

Wondering if your small business might qualify? RBF investors usually look for companies with revenue run rate of $1 million or more; gross margins of 50% or higher; a solid plan for use of funds with a near-term return, and who are seeking $100k to $500k in funding immediately.

Small Business Credit Cards

A credit card is a fast and easy way to get capital, and most lenders have cards specifically geared toward small businesses. Unlike other forms of financing, credit cards usually come with a points or rewards system of some kind, and you may be able to leverage that to help your business even further. But with business credit cards also come high interest rates—sometimes as high as 25%—so you want to make sure you weigh all the pros and cons before deciding if this is the right option for you.

Which Alternative Lending Option Seems Right for You

There is no single standard for determining the best alternative lending for your small business.

In general, the lending option you select depends on where you stand on the small business spectrum. If you’re just opening a new company, you probably won’t qualify for anything significant from a traditional lender. However, if you’re seeking $25,000 or even $50,000, a peer-to-peer lending option could make sense.

Conversely, if your business is up and running, and has a good track record of revenue performance, a merchant cash advance could meet your needs. If you’re experiencing slow payment cycles from clients and customers, then a factoring or revenue-based deal may make good sense.

To protect yourself no matter what type of lending option you use, make sure it adheres to the Responsible Business Lending Coalition’s Bill of Rights, which calls for greater transparency and accountability from all business lenders and financing platforms, giving small business owners, as the RBLC puts it, “fundamental financing rights that we believe all small businesses deserve.”

What You Can Expect to Pay in Alternative Loan Rates

Depending on the financing option chosen, interest rates will vary significantly. For example, variable interest rates on business credit cards can be anywhere from 13% to 25%. While peer-to-peer loan interest rates are comparable to those of traditional bank loans, which run anywhere between 7% to 36%, depending on your business credit score. P2P loan borrowers may also have to pay additional fees (on top of interest rates), but if your business has an unfavorable business credit score or is having trouble securing financing elsewhere, that might be the price you have to pay.

Why Alternative Lending vs Traditional Lending

When it comes to traditional lending, many small businesses are at a disadvantage. This is especially true for those just starting out. In fact, the average small business loan approval rating is about 50%.

If your business is able to secure the funding it needs through a bank or credit union at a decent interest rate, count yourself lucky because many small businesses cannot, whether it’s because they have no capital, low business credit scores, or something else keeping them from getting the financing they need. This is why it can be so important to know about all of the different alternative lending options available today. Being denied a business loan doesn’t mean that your dream is over. It simply means that you have to look elsewhere for funding. Chances are that if you explore all of the options out there, you will find the funds you need to grow your business.

Build Your Business Credit Now

Even when seeking alternative funding over traditional, you still may need to have strong business credit. While the alternative loan process generally isn’t as long and doesn’t have as strict of standards as the traditional loan process, that doesn’t mean lenders won’t look at your business credit report. Regardless of what type of lending you apply for, being able to show that you pay bills on time and manage your finances well can only help you.

It’s important to remember that any credit history takes time and planning. First, start getting a free D&B® D‑U‑N‑S Number if you don’t already have one. Once you’ve got a solid report, you can start monitoring your profile so you’re always on top of changes to your scores and ratings.

A New Era in the Business Lending Sector

Alternative lending represents a legitimate game changer for small businesses frustrated with traditional bank financing options.

Via any channel – peer-to-peer, online platforms, merchant advances, small business grants, or revenue loans — business owners now have a new path for cash that allows them to bypass traditional lending sources, thus opening up a robust and revolutionary financing market — just when business owners need it most.

*Dun & Bradstreet does not endorse any of the lenders on this site [] and is not responsible for the outcome of any loans or contracts.

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