Introduction to Alternative Business Loans

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by Chamber of Commerce Team
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Being a small business owner or an entrepreneur today is drastically different than it was just 20 years ago. Securing funding for launch or scaling used to be as simple as going to the community bank and asking for a loan.

These days… not so much. After the 2008 recession, banks are much more cautious in doling out money to small businesses. That’s not unreasonable considering about 1 in 3 small businesses fail by their second year and half are gone by year 5.

On top of that, due to strict regulations imposed on banks after the financial crises, the total number of small business loans disbursed annually is still 41% lower than pre-2008 levels, and 60% of the loans granted are for less than the amount applied for.

Suffice to say, it’s not a good time to be a small business owner seeking a traditional loan. The sorry state of loans, combined with the expansion of online businesses, has led to the rise of alternative loans.

Alternative loans are usually not disbursed by banks and are not subject to all of the same regulations. Of course, that’s both good news and bad news. You can often find an alternative loan type that is perfect for your business or particular situation, but the terms of alternative loans can sometimes be predatory.

Check out our guide on the Small Business Loans

Alternative business loans are the solution for small businesses and entrepreneurs

Even considering the difficulties of actually securing a traditional business loan from a bank or credit union, alternative business loans are almost always a better answer.

Business today isn’t the slow, plodding beast of decades past. It’s fast-paced and it demands agile funding options. Business owners can’t wait for the bureaucracy, red tape, and paperwork to be settled in a global market with mercurial conditions.

Alternative business loans provide faster, more flexible funding to satisfy any modern business.

Here’s an overview of the primary types of alternative business loans, who could use them, and the terms you can expect.


Short-term alternative business loans

Short-term alternative business loans are structured much like a traditional short-term business loan, but the requirements to qualify are lower and the rates are higher.

Although many short-term business loans will set you on a plan for repayment within about 3 years, you shouldn’t take out a short-term loan unless you will be able to pay it in full within 6 to 12 months. Be careful to avoid companies with an early-repayment (AKA prepayment) fee.

The application process is fast and the funds are available within one or two business days.

A short-term alternative business loan is ideal for:

Anyone who needs money immediately and is confident they can pay it back quickly.

  • New manufacturers that have landed a relatively large contract and need a cash injection to scale rapidly to meet quotas.
  • Retail and Ecommerce companies that want to capitalize on seasonal trends might use a short-term alternative business loan to buy the extra stock before the holidays.
  • Short-term alternative business loans are a fast method of responding to emergencies such as critical equipment failure while insurance is being dealt with.

Short-term alternative business loan requirements and terms

  • Funding amountsIt can vary drastically depending on the vendor. Most bottom out at around $5k minimum and go up to around $250K. There are vendors with higher limits, but they’ll have more stringent requirements.
  • Required credit scoreMinimum of 500 personal and business credit score. Requirements scale with the lending amount.
  • Required time in businessRarely are short-term loans given out to brand new businesses. Most vendors want to see at least 9-12 months of business.
  • Required revenue Highly dependent on the size of the loan. A $5k loan, for example, will require at least $30k in yearly revenue.
  • Rates and feesRates are among the highest, starting at 20% APR but often around 40%.

Best vendors for short-term alternative business loans

Short-term alternative business loans are a popular product for lenders since the profit margins are large – how could they not be at 40% APR? There is no shortage of vendors for this loan.

Here are a few of the good ones:

  • Kabbage is an especially great lender. It’s also somewhat untraditional: you get approved for a certain amount, then you can withdraw as needed. There’s no danger in borrowing too much money! Additionally, rather than paying a classic APR fee, you pay a small percentage (between 1 and 10%) of the total principal each month – and the percentage decreases as you get closer to the end of your term.
  • RapidAdvance is the choice for small businesses that are ready to grow and need a cash injection to get to the next level. While they have higher requirements than some (2 years in business, minimum $5k/month revenue), they also provide short-terms loans up to $1,000,000. The daily repayment plan they offer is geared towards efficiently managing cash flow during the repayment period.


Medium-term alternative business loans

A medium-term alternative business loan is exactly what you would expect – longer repayment time frame (around 1-5 years), better rates, higher loan caps.

But they don’t give these out to just anyone. It’s more competitive than the short-term alternative business loans. Lenders only disburse these loans to well-established businesses.

A medium-term alternative business loan is ideal for:

If your company has been chugging along in the positive for some years but you’re ready to accelerate the pace, this is the loan for you. Alternatively, it’s good for businesses that have hit a downturn, perhaps due to current events or market trends, and need capital to get back on the right track.

  • A medium-term alternative business loan is well suited for companies looking to invest in new equipment, infrastructure, or space for long-term growth.
  • If you want to expand your range of services and need to hire and train new staff, a medium-term loan will offset costs until you see a return on employee investment.

Medium-term alternative business loan requirements and terms

  • Funding amountsMedium-term loans are rarely 4-digit, most start at about $25k and can go up to $1m or more.
  • Required credit score At least 600 personal and business credit score.
  • Required time in businessA minimum of one year is necessary for a medium-term loan, most lenders want to see 2 to 3 years of continuous operation.
  • Required revenue$50k in yearly revenue is the very low end of the spectrum. Most medium-term loans are given to companies with $150k to $1m annual revenue.
  • Rates and feesRates start at about 10% and commonly go up to 30% depending on the amount borrowed and credit score.

Best vendors for medium-term alternative business loans

Medium-term alternative business loans are a less risky business, so there are always ample providers. A solid business won’t have trouble finding willing lenders but might not easily find ones that have decent rates. Here are some that have a good reputation:

  • Lending Club is a bit of a compromise between short-term loans and medium-term loans. They only require a year in business and $50k in annual revenue and they’ll loan up to $300k to qualified businesses. You can receive money as quickly as 3 days after being approved, instead of the standard week or two. Rates are industry average.
  • BitX is a good option for small businesses (and they have a lot of experience dealing with restaurants). Their loan amounts range from $25k to $500k and with repayment terms of between 1 and 5 years. You’ll need a better than average credit score to secure a good rate, but then that rate is fixed for the duration. They’re also flexible with payments, offering weekly, biweekly, or monthly options.


Hard money loans

Although everyone could probably use some cold, hard money, these loans are specifically for real people or businesses dealing in real estate.

The basis of a hard money loan is using your existing personal (or commercial) real estate as collateral to purchase more real estate.

A hard money loan is ideal for:

Hard money loans are fairly niche and often have harsh terms. They’re useful for people and companies that need cash immediately to purchase real estate that will be turned over in the short-term (within a year or so).

  • If you’re a flipper (a person who fixes and flips houses for profit), this could be right up your alley. You might use a hard money Loan In the scenario that you have a house or two and your funds are tied up, but a can’t-miss opportunity comes up. You can use your current properties as collateral to secure a loan for the next one.
  • Similarly, a real estate company that has many properties and wants to expand but doesn’t have a lot of liquid cash would utilize a hard money Loan. They can bank on being able to repay the loan quickly when rent comes in.

Hard money loan requirements and terms

  • Funding amountsIt depends on the value of the property and your credit score, but you can receive up to 80% Loan-to-Value (LTV).
  • Required credit scoreHard money loan lenders want to see good credit when investing in real estate. 650+ credit score at minimum.
  • Required solvency A hard money loan requires no bankruptcies or foreclosures (in recent time), as well as a debt to income ratio of less than 1:3.
  • Required paperworkMinimum 3 months bank statements, personal and/or business tax returns, property appraisal, property contract of sale, repair estimate, P&L statements.
  • Rates and feesBetween 7%-15% APR. Some require down payments.

Best vendors for hard money loans

Vendors for hard money loans are as varied as the properties they fund. Maximum loan value can reach the low millions, and payback term length can be anywhere from 2 to 25 years.

  • Do Hard Money is a lender that aims to help people get into the business of flipping. Although rates are high, they offer 0% APR for the first 5 months so that flippers can focus on house rehab instead of money. They also provide education and loans to people totally new to the business.
  • Longhorn Investments’ shtick is cutting out the superfluous. They have simplified and streamlined the process of applying for hard money loans by reducing the amount of paperwork required and closing deals within a week (whereas most other investors take more than a month).


Merchant cash advance

Whereas most loans are given based on factors like credit score or revenue, a merchant cash advance only looks at your cash flow. To qualify, you simply have to hand over reports detailing credit card receipts.

The benefit is that many new (and struggling) businesses can qualify despite not having proven themselves quite yet. (In fact, it’s even possible to start a business when you find yourself with bad credit and no money.)  Nevertheless, the repayment also fluctuates proportionally to the amount of sales made.  

A merchant cash advance is ideal for:

A merchant cash advance sounds pretty swell on the surface, but the reality is that it’s a last resort option. The rates are usually criminally high, and so the chance of coming out on top is quite low.

  • Merchant cash advances are usually used by floundering retailers trying to stay afloat during the boom and bust cycles of their industry. A clothing retailer, for example, might take one out to survive the Q3 slump and make it into Q4 where sales are all but guaranteed.
  • If you or the business have bad credit, recent bankruptcies, liens, or outstanding debt you will probably be denied other types of alternative (and traditional loans). The merchant cash advance isn’t so discriminating as long as there is proof of sales.

Merchant cash advance requirements and terms

  • Funding amountsExpect between 50% to 200% of monthly credit card sales volume.
  • Required credit scoreNot a significant factor in being accepted for a merchant cash advance.
  • Required time in businessYou only need to have proof of sales, so as little as 3 months.
  • Required revenueIt varies, but you can be approved with as little as $3k monthly revenue.
  • Rates and feesStandard rates are between 40%-90% APR.

Best vendors for a merchant cash advance

Although the lowest rate possible is always a consideration, it’s especially poignant when you’re talking average rates of 80% APR. Some of the lowest rate vendors are:

  • National Funding is a popular option because they are quick (payments within about 3 days) and it’s fairly easy to apply and be approved. Their lowest rates are 30%, but securing that would require an exceptional application.
  • Credibly requires a higher monthly revenue (around $15K) but also offer competitive terms. Repayment is remitted from each credit card transaction made – both a blessing and a curse, but debts are paid back quickly.


Peer-to-peer real estate financing

Peer-to-peer real estate financing is simply the process of securing a loan from an individual, rather than a bank. In many ways, it’s just like VC funding or an angel investor for real estate.

Terms are generally quite reasonable, but since it’s an individual assuming the risk, they will have stricter requirements for applicants. You’ll need to be in good financial standing to be approved for peer-to-peer.

Peer-to-peer real estate financing is ideal for:

Since these alternative business loans are exclusively for real estate, it targets a small crowd.

  • The primary user of peer-to-peer real estate financing is the home flipper. Not just any flipper, though – investors only want experienced, successful flippers that are looking to take on bigger projects.

Peer-to-peer real estate financing requirements and terms

  • Funding amountsIt’s possible to secure loans for up to 90% TLV.
  • Required credit scoreAt least 650, but shoot for 700.
  • Required time in businessNo time required, just a history of successful flips.
  • Required revenueYou have to have a less than 50% debt to income ratio.
  • Rates and feesRelatively low at 6%-12%, repayment over 1 to 2 years.

Best vendors for peer-to-peer real estate financing

Since it’s peer-to-peer, the emphasis is less on a big vendor. Instead, it’s a deal between two individuals. That being said, there are two main sites where these deals are facilitated

  • Lending Home is a platform that hosts thousands of these deals and is a popular choice for wealthy investors (that means more money for loans!). The downside is the $350 application fee; the upside is that they loan for rehab costs as well as real estate.
  • Patch of Land is unusual in that it accepts first time flippers and even has a mentorship program. They are known for the quick loan turnarounds – usually money is disbursed within a week from approval.


Online inventory financing

Online inventory financing comes in two flavors: either as a short-term loan or a line of credit. The borrower has to have collateral to loan against – the inventory you’re purchasing, existing inventory, or (rarely) other assets.

The benefit of Online inventory financing is the funds are available on the order of weeks, rather than months. It also tends to have lower rates than other similar loan types.

Online inventory financing is ideal for:

It’s best for Ecommerce companies or brick and mortar retailers. You can only use Online inventory financing to purchase more inventory, so it has little application beyond the storefront.

  • For seasonal upswings, preparing for quarter 4, or replenishing a stock that sold out to quickly (before funds are made available). It’s especially pertinent for online retailers, where payments can sometimes be held for 30-60 days.
  • An existing business, such as an Amazon FBA private label, that wants to launch a new product as soon as possible to take advantage of current events would benefit from the immediate cash injection.

Online inventory financing requirements and terms

  • Funding amountsMost are around $50k with an upper limit of $500k
  • Required credit scoreNone, inventory as collateral.
  • Required time in businessMeasured by successful product lines.
  • Required revenueN/A
  • Rates and fees 20% to 30% APR

Best vendors for online inventory financing

For an online inventory financing vendor the main criteria are how fast the payment is disbursed, what the rates are, and how much inventory is necessary to qualify.

  • FastCapital360 is one of those companies that prides itself on quick and painless applications (so much so that they have no application fee). Unlike other Online Inventory financers, it requires a minimum revenue of $120k a year… but they also finance up to $1m.
  • KickFurther has an interesting model that you’ve seen before – it’s basically Kickstarter except that it funds company growth through product launch. Backers get dividends, too. Keep in mind that it requires social inertia to be successful.


Equipment financing

Equipment financing is a somewhat ambiguous term – it includes several types of funding. Some equipment financing is simply a medium-term loan with restrictions on what can be purchased with the funds. In other instances, it’s more like equipment leasing than a loan.

As an added bonus, rates are usually quite low because the equipment also serves as collateral.

Equipment financing is ideal for:

Equipment can be very expensive… and lenders know that. They’re often willing to fork over large amounts because there isn’t very much risk if it can be repossessed in case of default. As a result, the purchase of pricey, specialized equipment is quite possible.

  • Anyone looking to expand their manufacturing capabilities with new tools or machines. Fabricators, craftsmen, even home-based businesses that need expensive tools are eligible.
  • Restaurants, coffee shops, or wine bars could use equipment financing to expand the menu with specialty dishes.
  • Equipment financing can be used to purchase vehicles, which is useful to most businesses.

Equipment financing requirements and terms

  • Funding amountsUp to $1m and more.
  • Required credit scoreNot necessary to have a particularly high score (since equipment is collateral). 550+
  • Required time in businessSome will fund startups, but most require a year or more.
  • Required revenueUsually have to pay a 5%-10% downpayment on equipment.
  • Rates and fees 6%-12% APR

Best vendors for equipment financing

It depends on where the business and where it is in its trajectory. Some lenders prefer working with the food industry, some fund established companies, still others will take a risk on startups.

  • FastCapital360 also offers equipment financing. It’s a good option here for the same reason as before – simple and fast. They offer both the finance and the lease models, funding amounts up to $2m, and don’t require down payments.
  • Smarter Finance USA is even faster – funds can be available within 72 hours of applying. They also have a robust system of discounted rates depending on credit score, age of business, and age of equipment being financed.


Invoice financing

Invoice financing, sometimes called invoice factoring, is a method of getting quick funds from an invoice owed. Receiving payments from B2B and B2G transactions is a notoriously laborious process (sometimes taking 60-90 days). Invoice financing speeds up the process… at a cost.

There are two ways invoice financing works. The first is that the outstanding invoice is “sold” to the financer, usually at around 80% value. The second is to get a line of credit based on accounts owed.

Invoice financing is ideal for:

Any company or individual that has invoices or contracts longer than a Net30. Waiting 45 days or more for a milestone payment (or worse, a lump sum at the end) can result in big cash flow problems.

Additionally, invoice financing doesn’t depend on your own credit score but of that of company invoiced. That makes invoice financing a great option for those with poor credit.

  • Governments, or large corporations, often operate on Net60 contracts. A contractor juggling multiple projects can’t afford to wait that long for payments to come in.
  • Some online platforms such as Amazon FBA operate on Net30 or more. Retailers, or occasionally affiliates, might need a payout sooner.

Invoice financing requirements and terms

  • Funding amountsDepends on value of invoices, can be in the millions.
  • Required credit scoreDoesn’t depend on the business’ or owner’s score, but rather the creditworthiness of the invoice payer.
  • Required time in businessNone to one year.
  • Required revenueJust need outstanding invoices
  • Rates and feesIf loan – about 40% APR

Best vendors for invoice financing

Invoice financing is a quick process. The financer will access your accounting software and determine which invoices are eligible for financing, then pay or make credit available immediately. There are also vendors for specific industries.

  • Fundbox features a “pay as you use” method of credit disbursement, there’s no need to withdraw more than necessary. That allows a business a huge amount of flexibility in access to liquid funds – and saves a lot of money in the long run.
  • BlueVine will finance invoices up to $5 million, give loans at 10% or less, and make funds available the same day as application. It’s hard to beat that kind of service.


Revenue-based financing

Also called royalty-based financing or simply RBF, revenue-based financing is a loan that takes percentages of revenue as payment instead of a predefined amount. It’s an exchange of future capital for present growth.

Revenue-based financing is always heavily customized for each business. There isn’t a standard model, nor minimum requirements. The result is that funding can take a while to materialize but the rates are usually agreeable.

Revenue-based financing is ideal for:

Revenue-based financing is usually reserved for high growth companies, high margin companies, or companies that combine both. Additionally, it requires a steady, predictable revenue stream.

  • Software as a Service companies (SaaS) are good contenders. They are often high margin and, in today’s startup world, can experience explosive growth.
  • Any subscription-based company is also a potential candidate. Recurring revenue that can be scaled is attractive to financers.

Revenue-based financing requirements and terms

  • Funding amountsBetween 1x-3x monthly revenue.
  • Required credit scoreNot too relevant.
  • Required time in business Long enough to determine stability (1-2 years minimum).
  • Required revenueMinimum $10k per month.
  • Rates and fees100%-250% of invested capital.

Best vendors for revenue-based financing

These vendors often develop something of a relationship with their clients, almost like an angel investor. Look for a vendor that’s compatible with you and your business.

  • Lighter Capital specializes in tech startups, providing up to $2m in capital. Their rates cap out at 2x and is paid over 5 years, which is pretty generous in the start-up space. Taking less than 10% of monthly revenue leaves the startup with plenty of cash to throw around.
  • Timia Capital serves as a platform to connect entrepreneurs and investors. That allows the business to negotiate favorable rates with an individual, rather than a faceless company. They accept tech startups as well as medical equipment companies and subscription-based businesses.

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