Reviewed by
Going to a bank for a loan won't work for every business and every circumstance. Maybe your company, for whatever reason, wouldn't qualify with one. Maybe you've already been turned down by a bank. Or maybe you just need the financing faster than a bank could realistically get it to you. That's when alternative business loans can be helpful.
Alternative business loans are a broad category of financing that tends to have more flexible qualification requirements and often approves and funds businesses faster than traditional banks do. The biggest trade-off is that each of the options can vary pretty widely in terms of total cost, terms, and repayment structure.
I have more than a decade of experience in this industry, helping small and midsize business owners get all types of business financing. It can be a confusing and opaque topic, so I'm going to walk you through exactly what alternative business loans are and how they work as if you were one of my clients.
I'll explain what the different options are within the category, how they compare with traditional bank financing, what lenders look for when assessing you, and how to choose the structure that best fits what you need the money for.
I'll also tell you about my company, Clarify Capital, and how we can help you apply for these types of financing options if and when you're ready.
| How it works | Best for | Typical speed | |
|---|---|---|---|
| Term loan | A lump sum you repay over a set period, usually with regular payments | One-time expenses when you know how much capital you need up front and want a set repayment schedule | As quickly as same day |
| Invoice factoring | You sell eligible unpaid invoices to a factoring company in exchange for faster access to cash | Business-to-business (B2B) businesses with unpaid customer invoices that need cash before those invoices are paid | 1 to 2 weeks |
| Business line of credit | Revolving financing you can draw from, repay, and use again as needed | Ongoing or recurring expenses like inventory, payroll gaps, and short-term working capital needs | As quickly as same day |
| Equipment financing | Financing tied specifically to an equipment purchase, with the equipment typically serving as collateral | Buying or replacing business equipment when you want the purchase itself tied to the financing | 1 to 5 days |
| Merchant cash advance | A lump-sum advance that is repaid from future business sales | Businesses with consistent sales that need fast access to capital and can handle frequent repayment | As quickly as same day |
What Are Alternative Business Loans?
Alternative business loans are loans that, as the name suggests, come from outside the traditional bank system. They can be made by non-bank lenders, online lenders, financing companies, and other private providers, and different types of alternative loans can include short-term loans, business lines of credit, equipment financing, invoice factoring, and merchant cash advances.
Usually, business owners turn to alternative lending options when they need money fairly quickly for some reason, can't meet a bank's loan requirements, or just want a specific financing structure for a specific need.
Bank Loans vs. Alternative Loans
Alternative loans and financing options are typically more flexible when it comes to underwriting standards, and often get you capital faster than a bank can. The downside is that they're usually more expensive overall. Here's an idea of how bank loans compare with alternative loans and the pros and cons of both options.
Pros | Cons | |
|---|---|---|
| Bank loans |
|
|
| Alternative loans |
|
|
The Most Common Uses for Alternative Loans
I've been working in this industry for more than 10 years. I've helped thousands of business owners get alternative loans. These are the areas I most often see them use the capital for, and the specific financing structure I recommend for each use case:
Hiring
A business line of credit can help cover payroll while you bring on new employees and wait for the added revenue to catch up with the added expense
Marketing
A short-term business loan can make sense for a defined campaign or other one-time marketing expense when you know roughly how much you need up front
Seasonal gaps
A business line of credit lets you draw only what you need to cover expenses during slower months, then repay it as revenue picks back up; if the cash-flow gap is caused by unpaid B2B invoices, invoice factoring may be a better fit.
Inventory
A business line of credit can work well for recurring inventory purchases, while a short-term loan may make more sense for a large one-time or seasonal order
Refinancing debt
A term loan may let you replace existing business debt with one new loan, particularly if you can improve the cost, repayment schedule, or overall terms
Emergencies
A business line of credit may be useful when an unexpected repair, equipment failure, or other urgent expense requires faster access to capital; for businesses with consistent sales that need money very quickly, a merchant cash advance may also be an option
Equipment purchasing
Equipment financing is designed specifically for machinery, vehicles, technology, and other business equipment, with the equipment typically serving as collateral
What Lenders Will Look For
Underwriting standards vary lender by lender, and because there are so many different types of alternative financing options, they will also vary across financing types and structures. But I can still give you a general idea of what you'll need to show when you apply for any type of financing. These are things that will help indicate what kind of borrower you'll be to a lender:
Credit profile
Your personal and business credit can help lenders gauge how you've handled debt in the past
Revenue and cash flow
Lenders want to see enough consistent income coming into the business to support the payment without putting too much pressure on day-to-day operations
Time in business
A longer operating history gives lenders more financial information to evaluate, and can make your revenue patterns easier to assess
Existing debt
Current loans, credit lines, leases, and other obligations can affect how much additional debt a lender thinks the business can reasonably take on
Collateral
Depending on the financing type, business equipment, receivables, real estate, or another asset may help secure the financing and reduce the lender's risk
Documentation
Expect lenders to review records such as bank statements, tax returns, financial statements, or other documents that help verify the business's finances
Clarify Capital fits into the alternative financing space as a broker and marketplace, not as the lender itself. We basically help you connect with the right types of lenders who are vetted and can help you get these types of loans. To do that and to work with us, we have our own basic requirements that we want your business to have:
