What Is Alternative Funding for Small Businesses?

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There are many small business lending options available to business owners in 2022, from traditional loans like Canada Small Business Financing Program (CSBFP) loans and bank loans to newer funding options from alternative lenders. It can be difficult for small business owners to discern the difference between each loan type, and even harder to choose the right lender or funding option for your business.

CSBFP loans are the most commonly recommended source of funding because of their lower rates, longer terms, and larger funding amounts. These are compelling advantages, but CSBFP loans also have drawbacks that can put them out of reach for many small business owners.

CSBFP loans are, by far, the hardest source of funding to acquire, with a lengthy application process that can take months, extensive documentation requirements that can take hours to compile, and the strictest approval requirements of any lender. Banks and other traditional lenders can be just as strict, tending to approve only well-established businesses with strong financial histories seeking larger loan amounts.

What do you do if you need a smaller loan, haven’t been in business for long, need funding quickly, or don’t meet the strict approval requirements of these lenders?

Alternative lenders are ideal for businesses seeking smaller loans, younger businesses, businesses that need fast funding, and businesses that may not meet the strict lending requirements of the CSBFP and other lenders. There are a number of alternative lending options available to small businesses, including direct online lenders, crowdfunding, and more.

Let’s take a closer look at three main considerations every small business owner should know about alternative lending, including:

  1. What is alternative funding?
  2. When should you consider alternative funding for small businesses?
  3. What types of alternative funding should your business consider?

What is Alternative Funding?

Alternative lenders emerged after the 2008 recession in response to a growing need for accessible small business funding. These lenders use new technologies to support the underwriting process, allowing them to offer a streamlined application and borrowing process for business owners who would otherwise be underserved by traditional lending institutions, including women-, minority-, and veteran-owned businesses.

These technologies also give alternative lenders greater flexibility with the amount of funding they can offer, as well as the types of funding and any associated fees. Rates and fees may be higher depending on your creditworthiness and risk assessment, but alternative funding is typically easier to qualify for, with less stringent approval requirements.

There are a number of types of alternative lenders for businesses to consider:

  • Direct online lenders: Direct online lenders offer alternative business funding directly to small business owners using a streamlined online application and a simple, more flexible underwriting process. In some cases these lenders can even supply funding in as little as one business day. Many funding options are available, including loans for smaller amounts, asset-backed financing, purchases against future receivables, and more. Key direct online alternative lenders include Greenbox Capital® and OnDeck.
  • Crowdfunding: Crowdfunding uses various online platforms to raise small amounts of funding from a larger number of individual investors, either in exchange for products or services or a certain number of shares in the business. There is no application process, but funding is never guaranteed—your success depends on the strength of your offer and how well you market your campaign. Key crowdfunding platforms include Kickstarter or EquityNet.
  • Private lenders: Private lenders use their own money to issue loans rather than funds collected from investors or depositors. These lenders are not limited by the same regulations as traditional lenders and are able to offer more diverse funding options. Some even specialize in certain forms of funding, such as loans for particular industries or business models such as franchises.
  • Marketplace lenders: Marketplace lenders like Lending Loop leverage technological platforms to connect borrowers directly with investors without involving a bank. They collect capital from investors and deliver it directly to borrowers, earning fees and commissions on the transactions. Many types of funding are available, including lines of credit, term loans, and more.

When Should You Consider Alternative Funding for Small Businesses?

Canada Small Business Financing Program loans may offer the lowest rates and best terms, but there are a number of circumstances in which alternative lending actually makes more sense for your business, such as when you need fast funding or if you don’t meet the strict approval requirements of these lenders. Here are 5 times when alternative funding may be the best choice for your small business.

1. Your timeline requires fast funding.

The CSBFP and other traditional lenders have lengthy applications that can take hours to compile and weeks or months to process, all with no guarantee of approval. Some business owners may not have time to navigate this process, or they may have unexpected expenses to cover or a short-lived opportunity to grow.

Direct online lenders have a much faster turnaround thanks to a streamlined application and underwriting process. In some cases, funding can be deposited in as little as one business day, enabling business owners to take advantage of short-lived opportunities to grow or to cover unexpected expenses without navigating a complicated and lengthy application process.

2. You don’t meet the strict requirements of other traditional lenders.

The CSBFP and traditional lenders have the strictest approval requirements, tending to only approve applications for large amounts from wealthy businesses. Most applicants are rejected, even those with healthy cash flow and a strong financial history. Businesses that can’t supply collateral, have low credit, or those that are just building their business credit face even greater hurdles with these lenders.

Alternative lenders have more flexible underwriting requirements that are more favorable to businesses with a wider variety of financial histories, including lower credit scores. A lower credit rating may mean higher rates and fees, but it does not mean your application will be automatically rejected by an alternative lender. Instead, direct online lenders will consider factors like business revenue, cash flow, and vendor payment history as indicators of your business’s future potential, rather than relying primarily on your credit score and financial history. Collateral is also often not required to secure a loan.

3. You need a smaller business loan under $500,000.

Traditional lenders prefer to grant large loans because they’ll generate more profit over the lifetime of the loan.

Alternative lenders have more flexibility and are more likely to approve applications for smaller loan amounts. The average merchant cash advance, for example, is approximately $30,000, but funding from as low as $3,000 up to $500,000 is available depending on your business’s needs and risk assessment.

4. Your business is relatively new and has been operating for less than 2 years.

Some lenders may offer financing for start-ups, but most traditional lenders require applicants to be in business for a minimum of 2 years in order to be considered for term loans.

Direct online lenders will consider businesses who’ve been in operation for six months. For start-ups and businesses in the prototype phase, crowdfunding is another popular alternative funding option.

5. You’ve never worked with another lender before

Traditional lenders often prefer to grant loans to businesses they’ve worked with before. If you’ve never received a loan from the bank, a credit union, or the CSBFP, this might put you at a disadvantage.

Alternative lenders emerged to help underserved businesses access the funding they need, and are always open to funding new clients. Successfully paying off a round of funding from an alternative lender may make them more likely to loan to you again in the future, but not having an existing relationship with these lenders won’t negatively impact your chances of approval.

What Types of Alternative Lending Should Your Business Consider?

Alternative lenders offer a number of unique and innovative financing options in addition to traditional lending options like lines of credit and terms loans. Here are three popular specialized forms of funding that are available from alternative lenders:

  • Merchant cash advances: Merchant cash advances are technically not a loan—they’re a purchase of future receivables. This means that a cash advance is granted in exchange for a percentage of your business’s future credit and debit card sales until the advance has been repaid. Payments are automatically deducted and will fluctuate daily with your sales. Merchant cash advances can be used for any purpose and are ideal for businesses with a high number of credit card transactions. Learn more about merchant cash advances.
  • Invoice factoring: Invoice factoring is a form of accounts receivable financing known as an asset purchase. With invoice factoring, a business’s unpaid invoices are leveraged in exchange for fast working capital. Multiple types of invoice financing are available, but the most common form is for a lender, called a “factor”, to purchase an outstanding invoice and advance your business up to 90% of the invoice’s value. When your client pays the invoice, the remainder will be paid to you minus any fees. Invoice financing can be used for any purpose and is ideal for businesses with long accounts receivable periods. Learn more about invoice factoring.
  • Equipment or inventory financing: Equipment or inventory financing is designed specifically to fund the purchase of new equipment or inventory, such as new store fixtures, heavy machinery, technology, or seasonal inventory. The equipment or inventory acts as collateral, and the funding can only be used to purchase the specific equipment or inventory it’s being sought for. Equipment or inventory financing is ideal for businesses with high or immediate equipment or inventory needs.

Is Alternative Lending Right for Your Business?

Direct online lenders and other forms of alternative funding are ideal for businesses that are seeking fast funding or don’t have time to navigate a complicated application process, businesses that don’t meet the strict approval requirements of the CSBFP and other traditional lenders, and businesses seeking smaller loan amounts.

If you need fast funding, have lower credit or no collateral, or need a smaller loan, alternative funding options like direct online lenders can provide the financing you need to keep your business operating at its best or continue to grow.

Learn more about alternative funding
Jordan Fein
Author: Jordan Fein
Contributor and expert in finance and loans, business and economics