Getting approved for a small business loan can be difficult for business owners, especially if you’re running a relatively new startup. Alternative lending provides business owners with an easier way to get the capital they need to start, maintain or expand their business.
That said, alternative lending options are typically more expensive than business loans from traditional lenders like banks and credit unions. So it’s important to consider all of your options before choosing one.
What is alternative lending?
Alternative lending includes business lenders that exist outside of the traditional lending space. The different types of alternative lending these lenders provide include short-term business loans, medium-term business loans, lines of credit, invoice financing, equipment financing, merchant cash advances and more. They don’t typically include bank loans or SBA loans.
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Many of these types of alternative lending are also available with traditional business lenders. However, alternative lenders typically have lower approval requirements, including less time in business, lower annual revenue requirements and more.
The top alternative lenders are typically online companies that can afford to make capital more accessible to business owners — in general, a risky business regardless of your company’s track record — because they don’t have the high costs of running bricks-and-mortar branches.
The top alternative lenders
Before we dig more into the different types of alternative lending, here’s what you need to know about the top alternative lenders and what they have to offer. As you compare each one, you’ll have a better idea of what to expect with what you can qualify for, the available terms, and the cost.
Kabbage is an online lender with a short-term business line of credit. Small business owners can borrow between $2,000 to $250,000, and pay it back over six or 12 months, depending on the amount of the line of credit and other factors.
Unlike a traditional business line of credit, Kabbage doesn’t charge an interest rate. Instead, it assesses a monthly fee ranging from 1.5% to 10%. This means that the cost of the loan depends not only on your creditworthiness but also on how quickly you repay the debt.
A high fee and a 12-month repayment period could result in an APR as high as 90%, so it’s important to run the numbers on the true cost of credit before you apply.
If a Kabbage line of credit sounds right to you, here’s what you’ll need to qualify:
- Be in business for at least one year.
- Have at least $50,000 in annual revenue or a minimum of $4,200 per month over the last three months.
- Have a personal credit score of 560 or higher.
OnDeck offers both business lines of credit and term loans. For both types of alternative lending, there’s a minimum credit score of 500 and a minimum annual revenue requirement of $100,000. You’ll also need to have at least one year in business.
The lender’s term loan ranges from $5,000 to $500,000, which you can repay over three to 36 months in daily or weekly payments. You can receive the funds in as little as 24 hours.
The annual interest rate (AIR) on the loan, which doesn’t include the lender’s origination fee and is not the same as an APR, can be as low as 9.99% — but it averages 48.7%. The loan’s origination fee varies based on creditworthiness and how many loans you’ve received from OnDeck in the past. For the first loan, it’s 2.5% to 4%, then 1.25% to 3% for your second, and 0% to 3% after that.
With the lender’s business line of credit, you can borrow between $6,000 and $100,000, which you can opt to receive instantly upon approval. You’ll repay the debt weekly.
The AIR on an OnDeck line of credit starts at 13.99%, but the weighted-average rate is currently 32.8%, according to the lender. There’s also a $20 monthly maintenance fee for the line of credit, but that fee will be waived for six months if you take an initial draw of at least $5,000 within five days of opening the account.
BlueVine offers three different types of alternative lending: lines of credit, term loans and invoice factoring.
With the lender’s line of credit and term loan, you can borrow up to $250,000, which you’ll pay back in automatic weekly payments from your business checking account over six or 12 months.
Interest rates can go as low as 4.8% on both loan options, though that’s calculated as a simple interest rate based on repayment over 26 weeks. The actual APR can range from 15% to 78%. Note that there’s a $15 bank wire fee if you choose to receive your line of credit draws that way. If you opt for ACH transfers, however, those are free.
To qualify for a line of credit or term loan from BlueVine, you’ll need:
- At least six months in business
- $100,000 or more in annual revenue
- A FICO credit score of 600 or higher
With invoice factoring, BlueVine purchases your invoices from you, giving you roughly 85% to 90% of the invoice amount as an advance. Your customers will then pay you at an account in your name that’s held by BlueVine. In other words, it’s not a loan, and BlueVine technically holds ownership of the funds once you sell them the invoice.
Once you’re paid, BlueVine will take back the advance and disburse the rest to you minus their fees, which are set at 1% per week with a three-week minimum.
One thing to note is that invoice factoring is not the same as invoice financing, which is a loan advance with an interest rate and fees. The main difference between the two is that your customers pay you back directly with invoice financing, and pay the factoring company with invoice factoring — although, in the case of BlueVine, they pay the lender but to an account with your name attached to it.
Funding Circle is a peer-to-peer lender that matches small business owners with individual investors who provide loan funds. Through Funding Circle, you can receive an installment loan of $25,000 to $500,000, with repayment terms ranging from six months to five years.
Interest rates range from 4.99% to 22.99%, and there’s also an origination fee of 3.49% to 6.99%, which will be deducted from your loan funds upfront.
Eligibility requirements include a FICO score of 620 or higher, two years or more in business and business revenue of at least $150,000 on your most recent tax return. Also, you can’t:
- Be a sole proprietor or nonprofit organization
- Have a bankruptcy on your business or personal credit report in the last seven years
- Have a history of felonies or financial criminal activity
- Have more than four personal or business tax liens in the past decade
Fundbox is another online alternative lender and offers a short-term business line of credit and invoice financing. With the business line of credit, Fundbox allows business owners to borrow between $1,000 and $100,000, with repayment terms of up to 12 weeks.
The interest rate that you pay can vary from 10.1% to 68.7%, based on your creditworthiness and the loan’s terms.
With Fundbox invoice financing, you can qualify for up to 100% of the invoices you use to secure the loan with the lender. You can borrow between $1,000 and $100,000, depending on the invoice amount, which you’ll then repay over 12 or 24 weeks. Instead of paying interest, you’ll pay a fee, which starts at 4.66% for 12-week repayment plans.
To qualify for a line of credit with Fundbox, you’ll need to have been in business for at least three months and have at least $25,000 in annual revenue, making it a decent choice for brand-new business owners. There is no minimum credit score requirement.
With invoice financing, you’ll need to have been in business for at least three months, plus have accounting software data tied to your business checking account for at least that same time period. You’ll also need to put up the invoice as collateral for the loan.
Types of alternative lending
While we’ve already covered a few types of alternative lending with the lenders above, let’s dig in a little more with each, plus some other options that may be available to you and your business.
Online term loans
Online term loans are similar to bank loans that you can get with traditional small business lending. But they typically come with shorter repayment terms ranging from a few weeks to up to a few years.
In many cases, you may actually have a hard time finding a short or intermediate-term business loan with a bank or credit union, so if that’s what you’re looking for specifically, consider an online lender instead.
Just remember that while these loans are typically easier to get than bank loans and you can usually get access to the funds more quickly, they also typically carry higher interest rates and fees.
Business lines of credit
Most business lines of credit from traditional business lenders come with long repayment terms. But if you don’t need access to a credit line over a long period and don’t want to get stuck paying interest for a long time, a short-term line of credit from an online lender may be worth it.
Just be sure to compare terms with multiple lenders to make sure you get the best deal. Whether it’s the repayment term and method, draw amounts, fees and interest or other features, the more you know, the better decision you can make.
Equipment financing is unique in that you can often get similar terms from both traditional and online small business lenders. Because you’re using the vehicle or another type of equipment as collateral for the loan, you may be able to qualify as a new business.
Unlike most of the other types of alternative lending, however, you’ll lose your equipment if your business fails or just can’t repay the debt. This can cause further problems that you might not have with an unsecured form of credit.
Just because equipment financing is less risky for the lender, though, it doesn’t mean anyone can apply. Again, make sure you know the eligibility criteria before you apply.
As previously mentioned, invoice factoring involves selling an invoice in your accounts receivable to a third-party company like BlueVine. In exchange, you get a percentage of the invoice in the sale and the factoring company takes the rest (though BlueVine only takes a fee and gives you the remainder when the invoice gets paid).
With invoice factoring, you may not get as much as you would with invoice financing. Also, by selling the invoice to the factoring company, you give them the right to contact your client to collect unpaid invoices, which could potentially affect your relationship with the client.
That said, invoice factoring isn’t a loan like invoice financing, so there are no credit requirements for you.
Merchant cash advances
A merchant cash advance a type of alternative lending that relies on your cash flow rather than regular installment payments. As its name suggests, a merchant cash advance is an advance on your business’ future credit and debit card sales.
After you receive the advance, the repayment terms typically include paying back the debt with a small percentage of your future debit and credit card sales. Depending on the amount of the advance and volume of your sales, it can take a little or a long time to repay a merchant cash advance.
In general, merchant cash advances are easy to get, primarily because they’re secured by your cash flow. But you’ll likely get denied if you don’t have solid revenues from credit and debit card sales. Also, their APRs can range from 20% to 250%, making them incredibly expensive for some business owners.
Good alternative lending startup options
While all of these different types of alternative lending are available to moderately or well-established businesses, brand-new startups with no revenue or time in business may have a tough time qualifying. If you’re in this position, here are some options to consider.
Websites like Kickstarter and Indiegogo are designed to connect new business owners with their prospective customers. Creating a campaign gives you the opportunity to showcase your product or service and encourage average consumers to pledge money to help you launch it.
In exchange, these customers can get early access to your product or service. To increase the appeal, you may even offer special discounts or other perks to those who pledge more than the bare minimum.
Crowdfunding can be a great way to get capital as a startup business owner because it doesn’t involve working with traditional investors or lenders. Instead, you’re getting money directly from the people who you want to sell your product or service to anyway, and your only obligation is to provide them with what you want to sell them.
Vendor credit is a form of alternative lending that you can set up with your vendors or suppliers. Instead of paying for a product or service immediately, for example, you can arrange to pay in 30, 45 or 60 days.
In general, you don’t have to pay interest in this type of arrangement, and if you do, the cost is relatively low. Also, some vendors may opt to give you a discount if you pay early.
Vendor credit can be a great way to manage your cash flow, as it gives you time to convert the costs you’re incurring for supplies or goods to sales to your customers and clients.
Business credit cards
Business credit cards don’t require any time in business or minimum annual revenue, and the revolving line of credit they provide makes them a solid option for ongoing working capital needs.
Business credit cards typically charge interest rates upwards of 20%, but that can be cheaper than a lot of other startup options that are available. And if you pay your balance in full each month, you won’t be on the hook for interest at all.
In addition to providing access to capital, some business credit cards also offer other features and benefits, including a rewards program, introductory 0% APR promotions, travel-related perks and protections, and more.
Even if you decide another loan type is best for your current situation, it may be worth having a small business credit card to use for regular expenses and get value from regular use.
How to invest in alternative lending
If you’re interested in making money off of alternative lending, you can do so with peer-to-peer business loan companies like Funding Circle and LendingClub. As mentioned before, these marketplace lenders don’t lend money directly. Instead, they connect business owners who need capital with individual investors who provide the money and get paid back with interest.
To give you an idea of how much you can make, Funding Circle lists historical annual returns of 5% to 7%, with an average of 5.3% since the company was founded in 2013.
Before you opt to invest in alternative lending, compare different marketplace lenders, as well as other investment opportunities. Also, consider the risks inherent to peer-to-peer lending, including loan default, that may not exist with other investment opportunities.
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