14 Types Of Alternative Financing For Small Businesses
These fast and more easily accessible alternative lending methods might be a better fit for your business than a traditional bank that has high borrower requirements.
Small business financing is notoriously difficult to procure. Most bank loans require that the applicant have stellar credit and two+ years in business – and even then, theres no guarantee youll get a loan, especially if youre applying with a large bank. According to Biz2Credit, big banks approved just 13.6% of all small business loan requests in , while small banks approved 18.9% of applicants, and alternative lenders approved the largest share, 24.5%, of SMB loan applications received.
Traditional loans became more difficult for small businesses to access during the pandemic, as banks were hesitant to lend to small businesses that might be at risk of closure. As a result, alternative “fintech” lenders were busier than ever, especially with fulfilling SBA-backed PPP loans.
Even as we emerge from the pandemic, small businesses are still turning to alternative business loans, as more business owners have gotten comfortable with online financing. With most of the options presented below, you can apply online and get funded much more quickly and easily than you would with a bank loan.
Read on to learn everything you need to know about the world of alternative small business loans. Well also give you some recommendations about reputable alternative lenders.
What Is Alternative Business Financing?
Alternative financing is a means of obtaining capital outside of the traditional banking system. Online loan marketplaces, crowdfunding platforms, third-party payment providers (such as PayPal), and cryptocurrencies (such as Bitcoin) are examples of alternative finance channels. For most businesses, alternative business financing means applying for a loan from an online lender of some sort. These lenders are sometimes called fintech lenders, a portmanteau of “finance” and “technology.”
The reasons a business might choose alternative business loans are multifold. Online financing can be a lot easier to obtain than a bank loan, especially if you have poor credit or not much time in business. Some businesses look into alternative financing because they have been turned down for a loan by banks or know they dont meet the minimum qualifications for a traditional loan. Other businesses choose an alternative lender because the online lender is faster and more convenient than a bank.
Note that some types of business financing, such as lines of credit and term loans, can be obtained through traditional (bank) or alternative (online) lenders.
Alternative Business Financing VS Traditional Financing
While alternative financing is a large category that includes numerous types of funding options, the traditional business financing space is more limited. Specifically, traditional business financing refers to term loans and lines of credit from a bank or credit union.
Banks approval rate for business financing is much lower than that of alternative lenders, and big banks are less likely to approve your request for financing than small banks. Banks are more risk-averse than alternative lenders, so they have more stringent borrower qualifications. For example, youll need at least two years in business to get a bank loan, though you may only need one year to qualify for a loan from an online lender. Another difference between alternative and traditional financing is that traditional loans are harder to access online; often, youll have to apply in person at your bank.
Though more difficult to access, a traditional business loan usually comes with a lower interest rate and longer repayment term compared to an alternative loan. Thats because alternative lenders typically charge a premium for the risk theyre taking on by funding less-established small businesses.