Loans guaranteed by the Canada Small Business Financing Program are widely considered to be the best funding option for small business owners because they offer the best terms, the lowest rates, and some of the highest funding limits. However, these benefits come with significant drawbacks—CSBFP loans are the hardest type of funding to acquire, requiring outstanding credit, collateral up to 25% of the value of the loan, and a lengthy application that can take weeks or even months to complete, all with no guarantee of approval.
Sometimes, businesses need funding quickly and simply don’t have the time to undergo such a rigorous application process. In other cases, a business may not meet the strict underwriting requirements despite having healthy cash flow and strong overall performance.
Loans from traditional lending institutions like banks or credit unions are often considered to be the next best option, but they can be just as difficult to obtain, especially if you don’t have an existing relationship with the institution. Many business owners may also consider turning to family and friends for funding, but mixing business with personal relationships can be fraught with its own unique set of challenges.
So what do you do if you need fast funding, don’t meet the strict underwriting requirements of the CSBFP or traditional lending institutions, or don’t feel comfortable seeking funding from family and friends? There are a number of non-federal and non-bank funding options available to small businesses in 2021, including alternative lending institutions like direct online lenders, easier-to-obtain conventional funding options like business credit cards, and new funding platforms like crowdfunding websites.
These alternative lending options are ideal for businesses who can’t or won’t be approved by traditional financial institutions, those that are seeking funding conventional lenders don’t offer, or for when you need working capital fast, especially in lower amounts.
This post will outline 10 non-CSBFP and non-bank small business loan options to help you narrow down your choices and select the right funding for your business. Some of these funding options are offered by both traditional and alternative lenders while others are exclusively available from alternative lending institutions, so before we jump in, let’s take a closer look at what “alternative lending” actually means.
What is Alternative Lending?
“Alternative lending” is an umbrella term that refers to any lending that occurs outside of a conventional financial institution like a bank or a credit union. This encompasses a variety of different lending models, including direct online lending, private lending, marketplace lending, and crowdfunding.
Alternative lending options emerged out of the 2008 recession in response to greater need for accessible funding for small businesses. By using new technologies to support the underwriting process, alternative lenders have streamlined the lending process for borrowers who were typically underserved by traditional lending institutions, allowing more of these businesses to access the funding they need to grow and prosper.
Funding from alternative lenders typically has higher rates but a much easier application process and significantly faster approvals. In some cases, funds can even be deposited in as little as one business day. These lenders are also more likely to grant loans for smaller amounts than traditional banks. Many types of financing are available depending on the needs of your business, including term loans, lines of credit, merchant cash advances, and invoice factoring.
There are four primary types of alternative lenders to consider:
- Direct online lenders: Direct online lenders like Greenbox Capital®, Kabbage, and OnDeck offer financing directly to small business owners using a streamlined online application process. These lenders offer a variety of alternative financing options depending on the needs of your business, including smaller loans, asset-backed financing, purchases against future receivables, and more.
- Private lenders: Private lenders use their own money to issue loans rather than depositors or investors. These lenders aren’t limited by the same regulations and restrictions as traditional lenders, so they are typically more flexible in granting loans, with diverse financing options available including asset-backed loans and bridge loans. They also have more flexibility in the amount of funding they can offer, with many offering smaller loans that traditional lending institutions won’t consider.
- Marketplace lenders: Marketplace lenders leverage technological platforms to connect borrowers directly with investors without involving a bank. These lenders collect loans from investors and deliver funding to borrowers, collecting commissions and fees on the transaction.
- Crowdfunding: Crowdfunding is especially popular for startups or businesses in the prototype phase. Using an online platform like Kickstarter, a business can raise small amounts of money from a large number of individuals to help support their business goals. This option eliminates the application process, but funding is not guaranteed—it ultimately depends on how compelling your offer is.
10 Non-SBA and Non-Bank Small Business Loan Alternatives
Alternative lenders offer a number of unique and innovative financing options for small business owners. Here are 10 options to consider if you’re looking for non-bank or non-CSBFP small business funding:
1. Term loans
Also referred to as installment loans, term loans are a more traditional form of financing in which a lump sum is deposited and repaid over a fixed term through pre-determined payments. They typically have the same basic borrowing and fee structure as term loans from traditional lending institutions, but term loans offered by direct online lenders are often more user-friendly and customizable.
2. Short term loans
Short term loans are a type of online loan that offers shorter repayment terms than standard term loans, usually within a year and sometimes within months. Short term loans typically use a factor rate fee structure rather than an interest rate fee structure, and often have more frequent payments.
3. Business credit cards
Business credit cards provide a revolving line of credit that many business owners use to cover day-to-day operating expenses. In addition offering other benefits such as cash back or other rewards or point systems, business credit cards are typically easier to qualify for than other forms of funding. They will also help you build a good credit history for your business (provided you pay your balance off each month), which can in turn make it easier to apply for other small business funding. However, business credit cards often come with high interest fees, making them less ideal for financing larger projects.
4. Business lines of credit
Business lines of credit are available from traditional lenders as well as alternative online lenders. Lines of credit operate similarly to business credit cards but with higher limits and lower rates, making them more ideal for financing larger projects or for businesses that want to access extra working capital but don’t require a specific amount of funding. They may also be harder to acquire, and may or may not require collateral. There are no limits on how your funding is used and you’ll only ever pay interest on the amount you borrow.
Learn more about alternative business credit.
5. Merchant cash advances
Merchant cash advances (MCAs) are available from direct online lenders. They are similar to a short term loan, but are not actually a loan—an MCA is technically a purchase of future receivables, which means that a cash advance is granted in exchange for a percentage of future credit or debit card sales until the advance is repaid. Since payments are based on your credit and debit transactions, the amount you pay will fluctuate alongside your daily sales.
Approval for a merchant cash advance is typically based on your business’s overall health and potential rather than your cash flow or credit history. This makes it easier for businesses to access funding when it’s needed, especially newer businesses, businesses in high risk industries, or those with low credit. Application requirements are more lenient than other forms of funding, and approval can be granted with funds deposited in as little as one business day.
Learn more about merchant cash advances.
6. Equipment or inventory financing
Equipment and inventory financing are special types of funding that are designed specifically to help business owners purchase equipment or inventory for their business, such as seasonal inventory, new store fixtures, technology, or heavy machinery. The inventory or equipment is used as collateral, so less importance is placed on factors like credit score and approval is typically not based on your other assets. However, this kind of financing may require a down payment before approval is granted.
7. Invoice factoring or invoice financing
Invoice factoring and invoice financing are also not technically loans—they are a form of “accounts receivable financing” known as an asset purchase. With this form of alternative lending, a business’s unpaid invoices are leveraged in exchange for fast access to working capital. Invoice factoring and invoice financing can take many forms, including:
- Invoice factoring: A lender will provide you with a percentage of an outstanding invoice’s value up front (typically up to 85%) and will take care of collecting payment from your customer. The remaining value of the invoice will be paid to you when the client pays, minus the lender’s fees.
- Invoice financing: A lender will grant you a line of credit using unpaid invoices as collateral. In this case, the lender does not purchase the invoices so it’s up to you to collect payment from your customers.
- Invoice discounting: A percentage of an outstanding invoice is paid to the small business up front, with the funding to be repaid along with accumulated interest and fees when you collect payment.
Learn more about online invoice factoring.
There are two primary types of crowdfunding small businesses can use to raise funds to support their business goals:
- Rewards-based: Offering donors products or services from your business in exchange for small amounts of funding. This type of crowdfunding is administered by well-known websites like Kickstarter or Indiegogo.
- Equity-based: Offering donors a certain number of shares in your business based on how much they contribute. This type of crowdfunding is administered by platforms like Crowdfunder, EquityNet, or Fundable.
Hybrid crowdfunding models are also available.
One of the major advantages of crowdfunding is that you don’t have to repay the funding. However, funding is never guaranteed and ultimately depends on the strength of your offer and your ability to market your crowdfunding campaign.
Some organizations offer grants to small businesses if they meet certain criteria. Before you apply for a loan, research grant programs offered by federal, provincial, and municipal government agencies, private foundations, and industry associations. Grants aren’t always easy to receive and often have strict approval criteria that rivals Canada Small Business Financing Programs loans, but the funding won’t need to be paid back.
Microloans are smaller loans of less than $35,000, usually around $5,000-$10,000, often with lower interest rates. Since the loan amounts are so small, microloans are typically not available from traditional financial institutions. However, alternative lenders, including both for-profit and not-for-profit lenders, have made microloans easier to access in recent years, particularly for startups or newer businesses and especially for under-represented groups like women-, veteran-, and minority-owned businesses.
Is Alternative Funding Right for Your Business?
Alternative funding offers a number of advantages over financing options offered by traditional lending institutions, including:
- Simplified applications with less paperwork and less rigorous approval requirements.
- Faster processing and approvals, with funding available in as little as one business day in some cases.
- More flexibility, including unique financing options and more room to negotiate terms.
Many types of alternative funding are available to businesses who need funding quickly, don’t meet the strict criteria of the Canada Small Business Financing Program and other traditional lenders, or would prefer not to seek funding from friends of family members. With funding from as little as $3,000 up to $500,000, business owners can access alternative funding that suits their unique needs, including merchant cash advances, term loans, invoice factoring, and lines of credit, as well as unique funding options like crowdfunding.
- “Startup Business Loans: Compare Best Options 2021.” Benjamin Pimentel. Nerdwallet. March 3, 2021.
- “Private Business Loans: Non-Bank Capital Funding.” GUD Capital.
- “14 Types of Alternative Financing for Small Businesses.” Shannon Vissers. Merchant Maverick. July 22, 2019.
- “Small Business Guide to Alternative Lending.” Adam Uzialko. Business.com. July 21, 2010.