3 Alternative Lending Options to Help Build Your Business Credit

3 Alternative Lending Options to Help Build Your Business Credit

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As a small business, it’s not always easy to qualify for a bank loan. If your business is young, has little collateral, or doesn’t have an established credit profile, qualifying for traditional bank financing can be even more of a challenge.

Because of the challenges involved with securing business financing, many small business owners turn to alternative lending options when they need to borrow money.

What Is Alternative Business Financing?

Alternative business financing is capital that you can borrow from non-traditional sources. This type of financing typically offers more flexibility in terms of the qualification criteria your company will need to satisfy, such as:

  • Credit Requirements
  • Collateral Requirements
  • Time in Business

As a tradeoff for the easier qualification requirements, alternative lending options generally charge higher interest rates and fees than bank loans. Alternative loans may require you to pay them back at a much faster rate as well.

However, if you can’t qualify for traditional business financing, an alternative business lender may be able to help you access the capital you need now. Plus, if you manage your alternative loan or line of credit well (and it reports to a business credit bureau), it might even help you to build business credit so that you’re in a better place to qualify for other types of financing in the future.

Read below for some highlights of three alternative lending options to help you build your business credit.

1. Online Business Loans

Once upon a time, if you wanted to borrow money for your business you had to make a trip down to your local bank branch or credit union to see if you could qualify for funding. However, a new generation of business lenders has since emerged to offer business owners an alternative way to secure capital.

Online lenders often have looser qualification requirements when compared with traditional banks. Nonetheless, you’ll still probably need to have decent personal and business credit to get approved. You should also expect that personal guarantees and collateral are common requirements for online loans — just as they’re often needed to secure traditional bank loans.

How to Qualify

  • On average, your business must have been established for at least two years (though some lenders accept applicants with less time in business)
  • Good business and personal credit are typically needed, but they may be less important (and the requirements may be less strict) than with traditional bank loans

Pros and Cons

Online loans can be a great option if you want to establish business credit, need business funding fast, or you’re only looking to borrow a small amount of cash. New businesses, unique businesses, and businesses without well-established credit history may also be able to borrow with an online lender when a traditional bank might say no.

But online loans aren’t always the most affordable option. If your primary concern is securing the lowest rate possible for business financing, an online loan might not make you happy. Traditional banks often (though not always) offer lower rates on business financing.

Also, some online lenders aren’t very transparent with their rates and fees. If you’re having a hard time understanding how much an online loan will actually cost you, try using Nav’s free small business loan calculators to translate fees and loan costs into APR. You can compare available offers from there.

Online Lenders to Consider

Line of Credit by Fundation

Fundation Group LLC is a technology-empowered direct lender that delivers lines of credit using its Learn More

Intermediate-Term Loan by LoanMe

LoanMe works well for businesses that don’t qualify for traditional loans or for businesses Learn More

Long-Term Loan by Newtek

Procuring financing for business ventures is often challenging for small business owners. From startup phase Learn More

2. Invoice Financing

Is your business structured in a way so that it gets paid after delivering services or goods to customers? If so, invoice financing is an alternative lending option that might work for you.

Invoice financing, sometimes called accounts receivable financing, is a way for a business to borrow against the money it’s owed by its customers. Essentially, your invoices become collateral for the funds you borrow from a lender.

How to Qualify

  • Usually only available for B2B businesses based in the United States
  • Credit requirements are generally less strict, but past credit issues, like bankruptcy or major liens, can be a problem
  • You may need to have accounting software that shows at least three months (or more) of data

Pros and Cons

Invoice financing can provide you fast access to capital (often within 1-3 business days). The application process is usually easy and requires minimal paperwork to complete.

On the down side, invoice financing can be quite expensive (with APRs ranging from around 14% to 68%). Payback terms are generally rapid as well. In most cases, you’ll be expected to make weekly payments to the lender until the loan is repaid in full.

Because of the high costs and quick payback requirements, invoice financing is best reserved only for emergencies.

Invoice Financing Companies to Consider

Invoice Financing by BlueVine

BlueVine gives small businesses an immediate advance on their outstanding invoices. We help businesses that Learn More

Invoice Financing by Fundbox

Fundbox offers business owners a simple way to fix their cash flow by advancing payments Learn More

3. Microloans

Microloans are issued through non-profit organizations aptly named microlenders. Although the maximum loan size is generally $50,000, the average microloan issued to a small business or startup is a much smaller $6,000.

How to Qualify

  • Usually only available to businesses with five employees or less
  • Credit requirements are generally less strict, but past credit problems can cause qualification problems
  • You may be required to attend a business training class

Pros and Cons

Interest rates on microloans aren’t the cheapest form of business financing available. But, the 12%-18% average rate is still reasonable, especially when compared with other alternative lending options.

Microloans are also known for having heavy documentation requirements. Thankfully, you may be able to receive mentorship from the lender as you navigate your way through the application process.

Perhaps the biggest benefit of using micro loans is the fact that they can potentially help you to build your business credit (assuming the account is reported to a business credit agency).  So, if you pay on time and manage a reported microloan properly, you may set the stage for your business to qualify for better funding options from a bank in the future.

Microlenders to Consider

Microloan by Kiva

Kiva is a non-profit that provides entrepreneurs with 0% interest loans up to $10,000. Kiva loans are Learn More

Before You Apply for Financing

Before you apply for any type of business financing, it’s a good idea to ask yourself the following five questions:

  1. Will this financing help me to solve a problem or strengthen my business?
  2. Can my company afford the payments on the money I want to borrow?
  3. How likely is my business to qualify for the loan?
  4. Is this the best deal available for my current situation?
  5. Does the lender report positive payment information to the business credit bureaus?

There’s no doubt that business financing can potentially be a powerful tool to help your business grow and succeed. However, all business financing — alternative or otherwise — comes with a level of risk.

It’s always wise to do your homework in advance before you decide to borrow money for your business. If you don’t rush the process, you’ll be much happier in the long term. You might even enjoy the added bonus of establishing a positive business credit profile that can be a valuable asset in the future.  

Ready to see your credit data and start building better business credit? Check Your Personal and Business Credit For Free (No Credit Card Required).

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