alternative loans

5 Alternatives Loans for Traditional Bank Business Loans

Ezra Cabrera | October 30, 2019


    Have you tried applying for a bank loan but to no avail? If it makes you feel any better, your experience isn’t an isolated case. Traditional financing institutions such as banks are notorious for turning down small business loan applications. In fact, recent figures show that out of 10,000 business loan applicants, 82% were denied by banks! Because of this, many small business owners prefer alternatives loan sources instead of banks.

    Both banks and alternative lenders offer business loans. But compared to banks, alternative financing has more flexible credit requirements, a simpler application process, and faster funding.  If you’re searching for alternative funding but don’t know where to start, here are the top five alternative sources of business loans.

    1. Short-Term Business Loans

    Short-term loans provide funding for up to $500,000 and are repayable within 3 to 18 months. Business owners prefer short-term loans because it’s easier to qualify for and funding and the process is quicker. Short-term loans are best used for short-term expenses.

    Compared to long-term business loans, short-term funding may have a higher APR. But if you can repay the loan in less than 12 months, it may be just as cost-effective as a long-term source. When looking for a loan, it’s better to focus on the total cost of the loan instead of the APR. For instance, a loan with 40% APR that’s repaid within five months may be cheaper than the same loan at a 4% APR that is repaid in five years.

    However, there are different factors you need to consider before choosing a loan. You’ll need to take into account your goals, the purpose of the loan, your budget, as well as the terms. It’s best you can talk to a reputable lending expert who can answer your questions and steer you in a direction that’s just right for you.

    Related: Bank Loans vs. Online Lending Companies Which One is Better

    2. Business Line of Credit

    A business line of credit is one of the most flexible loans available for business owners. You can apply for a line of credit from banks or an online lender, but by far, it’s easier to secure one from an alternative lender. This type of loan works similar to a credit card where lenders assign you a predetermined credit limit that acts as a safety net for businesses.

    You can use the funds for almost any business purpose, as long as it benefits your business. Unlike term loans, you don’t have to repay the entire credit limit; you only are required to pay back the amount you’ve withdrawn plus the assigned interest.

    This type of alternative loan is perfect for business owners that don’t have a specific amount in mind but need additional working capital in order to cover business expenses such as payroll, inventory, and things like utilities during slow seasons.

    3. Invoice Financing

    Invoice financing is a great option for companies that experience cash flow issues due to late-paying customers. As long as you have a good amount of pending invoices from creditworthy customers, you’ll most likely qualify for invoice financing.

    With invoice financing, you sell your pending invoices to third-party companies at a discount. Factoring companies or lenders will give you an advance that’s equivalent to 80% to 90% of your total invoice value. Once your customers pay their invoices, you’ll receive the remaining balance minus a small transaction fee.

    4. Merchant Cash Advance

    A merchant cash advance is not a loan, but rather an advance against your future card transactions. Lenders will give you a lump sum upfront which you then repay a percentage (plus interest) from your daily card sales. Unlike traditional loans, the amount you pay depends on your sales.

    It’s relatively easy to qualify for a merchant cash advance. As long as you have a considerable amount of daily card transactions, you’ll likely qualify. However, a merchant cash advance can be much more expensive than regular bank loans. Many business owners apply for an MCA because they can’t qualify for any other type of funding. On the contrary, a merchant cash advance is one of the few financing options that are viable for new businesses, companies with bad credit, etc.

    Related: 5 Effective Tips to Qualify for a Merchant Cash Advance

    5. Equipment Financing

    As the name suggests, equipment financing is ideal for businesses looking to purchase new equipment. With equipment financing, lenders give you working capital to purchase equipment. Some lenders will advance up to 100% of the equipment value, while others will require a down payment or fund a smaller portion of the purchase. The equipment you’re looking to purchase serves as collateral for the loan, which means the lender can repossess the equipment in the event of a default.

    Check Out Alternative Loans for Small Business Owners

    Alternative loans from online lenders can be the answer to your business’ financial concerns. It’s easier to qualify for and the underwriting process doesn’t take long compared to traditional loans. If you don’t know which loan is best for your business, our financial experts can answer your questions and steer you in the right direction.

    About the Author

    Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.