10 Alternative Financing Solutions Instead of a Business Loan
The approval process for traditional business loans at banks and credit unions is often complex and time-consuming. The requirements can also be stringent, leading many companies to seek alternative financing solutions so that they can meet approval demands and access the extra capital they need faster.
In this article, we’ll explore some of the most popular alternative lending options available, like working capital advances, business lines of credit, and others that could help you secure the funds your business needs.
10 Alternative Financing Options That May Work Better for Your Business
Alternative lending solutions are designed to offer the speed and flexibility that today’s businesses require, especially when traditional business loan requirements aren’t a good fit.
You can secure the capital you need, whether you have a startup company you’re looking to expand or an established business that needs more customized financing. Here are 10 different ways to get funding.
1. Crowdfunding
Crowdfunding platforms like Kickstarter, Indiegogo, or GoFundMe allow businesses to raise money by collecting small contributions from a large number of backers. This is usually in exchange for early access to a product, perks, or equity.
There are three main types: rewards-based crowdfunding (your investors receive your product when it launches), equity-based crowdfunding (investors receive a small number of shares in your business), and donation-based crowdfunding (most used by charitable, nonprofit, community development, or social ventures).
In recent years, crowdfunding has become a popular choice of alternative financing with businesses wanting to turn a prototype into a fully-fledged product — especially when traditional funding like bank loans is not an option.
Positives
No repayment or equity (rewards-based): If you go the rewards route, you won’t give up ownership or owe anything back, aside from delivering promised rewards.
Marketing boost: A strong campaign is great for building brand awareness for your product and company while raising money. Your backers become your first customers and promoters, injecting cash into the business when it needs it the most.
Proof of concept: If you manage to persuade hundreds or even thousands of investors to back you, this is validation of your idea and proof that people want it.
Negatives
All-or-nothing funding (in most cases): If you don’t hit your target, you’ll probably get nothing at all, meaning you put in all the work but walk away with nothing.
Effort intensive: Running a crowdfunding campaign takes a lot of time and planning. You’ll need marketing assets, a video, a solid pitch, and consistent promotion for your fundraising to gain any traction.
Reputational risk: Not answering questions, delays in delivery, and sub-par products will damage your reputation and hurt future fundraising campaigns.
2. Peer-to-Peer Lending (P2P Lending)
Peer-to-peer lending is a type of financing that works by connecting businesses directly with individual investors, bypassing traditional financial institutions. Popular P2P lending platforms include Funding Circle and Honeycomb Credit.
Each P2P platform will work a little differently. But in general, you start by uploading details about your business proposal, why you’re borrowing, and how much money you need to raise. Investors can review your proposal, decide whether to offer funds, and then contact you with their competitive rate offer.
This approach blends elements of crowdfunding and marketplace lending with more traditional lending, creating an attractive alternative for businesses to access capital. However, you only receive the financing if you raise the full amount you request.
Positives
Easier approval: Many borrowers find the simpler and less stringent application process for this type of alternative financing much easier than traditional bank loans. It is also more forgiving of bad credit.
Fast funding: Getting the financing you need on a P2P platform can take as little as three days to a week.
Creates buzz: Social media campaigns that promote your proposal and create momentum can build enthusiasm, potentially securing investors who also become customers.
Negatives
Higher interest rates: Since collateral isn’t always required, higher interest rates are the norm in P2P lending — large and small businesses alike can expect to pay 6.70% to 35.99% APR on a P2P loan.
Variable rates: Interest rates may fluctuate, meaning your monthly payments could go up (or down) depending on market conditions.
Eligibility limitations: Many P2P lending platforms require borrowers to have a minimum credit score, and some may restrict specific industries or startups from applying.
3. Accounts Receivable Financing
With accounts receivable financing (or invoice factoring) you sell your unpaid invoices to a factoring company. They then advance you a lump sum, typically between 70% and 90% of the invoice amount. When the customer pays the invoice, you get the rest of the money, minus the factoring fee.
This type of alternative lending is primarily available to business-to-business (B2B) and business-to-government (B2G) companies, not those who sell directly to consumers.
Positives
Flexible options: Many factorers allow you to choose which invoices to send them, giving you more control over your cash flow.
No credit score requirement: With this type of alternative financing, lenders base their approval rates on your clients’ creditworthiness, not yours.
Fast funding: Once you send your invoice to the factorer, you can receive funds in as little as 24 hours.
Negatives
Costly: Fees and interest on outstanding invoices can add up, making factoring more expensive over time when compared to other small business lending options.
Credit control concerns: Some factoring companies may operate without non-notification services. That means you can’t always control how customer interactions are handled, and the factorer may aggressively pursue overdue invoices.
Personal liability: In some cases, you may be personally responsible for invoices they can’t collect if your business fails. However, some lenders offer non-recourse factoring to businesses with solid histories.
4. Merchant Cash Advances
With a merchant cash advance, you receive a lump sum advance of future credit and debit card transactions. The lender then takes a percentage of your daily card sales until the advance is paid off. Keep in mind, you’ll be charged a factor rate on the amount you borrow, which is similar to paying interest.
Positives
Fast approval: You can get the business financing you need in as little as 24 hours.
No collateral: Unlike some lending options, you don’t need to sign over collateral or agree to a personal guarantee.
Flexible repayment terms: What you repay is a percentage of the daily sales you make on payment cards. So, if business is slow, you pay less.
Negatives
High cost: Factor rates can be between 1.1 and 1.5, which equals a borrowing fee of about 10% to 50%. For example, if you borrowed $50,000 and have a factor rate of 1.3, you would need to repay $65,000.
Cash flow: Daily repayments can strain your cash flow if your business operates on narrow margins, and you risk insolvency if you suffer a prolonged dip in revenue.
Restricted access: Businesses with low card sales might struggle to get their loan application approved for merchant cash advances.
5. Small Business Administration (SBA) Loans
The Small Business Administration loan program offers funding support to small businesses and entrepreneurs who are unable to be approved for a traditional bank loan.
The two most popular types of loans are the SBA 504 and the SBA 7(a). Both options are popular alternative financing solutions for small business owners seeking loans of up to $5.5 million for a variety of reasons, from purchasing commercial real estate to expanding their companies. Each type of SBA loan is different, but they share the following positives and negatives.
Positives
Competitive terms: SBA loans offer lower interest rates and longer repayment terms than traditional loans.
Build credit: SBA business lending is easier to obtain than bank loans. Plus, your credit score could improve if you manage your account well.
Flexible use: Depending on the loan program, the funds can be used for things like debt refinancing, equipment financing, and working capital.
Negatives
Slow processing: Due to extensive paperwork, getting an SBA small business loan may take a couple of months.
No guaranteed approval: While SBA loans have more favorable eligibility requirements than traditional loan options, there isn't a guarantee that you'll be approved.
Down payment required: Most SBA loans require a down payment of 10% or more of the total project or plan cost.
6. Angel Investors and Venture Capital
Angel investors and venture capitalists (VCs) are two similar options that provide equity financing or funding in exchange for equity.
Angel investors work with startups and early-stage businesses to add value to the business. The investors will provide funding and support for a certain time frame or until a certain goal is met. This can range from a two- to three-year exit plan to longer-term growth goals, with some holding their stakes for upward of 10 years.
Venture capital firms seek to drive rapid growth and sell their stakeholding for a profit.
Angels and VCs offer a wide range of funding deals, so you’ll need to do due diligence on your prospective partner and the deal you’ve been offered before you sign.
Positives
Guidance and support: Angel investors and VCs often offer mentorship and access to their know-how and connections.
Significant capital: These investors can access their own funding plus additional capital from non-bank financial institutions and other alternative lenders if necessary.
No monthly repayments: Unlike with standard and other alternative loans, you don’t need to make monthly repayments to your angel investor or venture capital firm, though some may take bonuses and dividends.
Negatives
Equity dilution: Angel investors and VCs typically offer funding in exchange for shares in your company, which can reduce your ownership percentage. They may also seek board seats, voting rights, or veto power.
Pressure to perform: You’ll be expected to deliver results for your investors. Underperformance may lead to changes in leadership or strategy, and you risk being fired from your business.
Highly competitive: Competition for angel investors and VCs is fierce, even with accelerators and online platforms like AngelList, so your business plan and leadership must be exceptional.
7. Business Credit Cards
Business credit cards are another alternative financing option for entrepreneurs who need quick access to cash for inventory, equipment purchases, and day-to-day operational costs. While credit cards are a convenient way to pay for expenses, they can be expensive and lead to ballooning debt.
Positives
Easy access: There are many options on the market, so obtaining a business credit card should be relatively easy for most companies.
Rewards programs: Many cards offer money back or discounts on common business expenses.
Credit building: Properly managing your credit card can boost your business credit score.
Negatives
Limited funding: You likely won’t be able to borrow as much with a credit card as you would with a loan or another alternative lending option.
Short-term funding: Businesses may need to pay off balances quickly, ideally within one billing period. Carrying a balance can lead to high and compounding interest rates.
Personal liability: Some credit card companies require a personal guarantee. If your business fails, this puts your personal assets at risk.
8. Business Line of Credit
A business line of credit is a flexible, revolving funding option offered by traditional financial institutions and alternative lenders, including fintech companies like Backd.
Business lines of credit give businesses access to a predetermined amount of funds that they can draw on as needed. For example, Backd offers credit limits between $10,000 and $750,000.
Positives
Genuine flexibility: You can withdraw funds whenever they’re needed, and you’ll only pay interest on the borrowed amount.
Self-replenishing: Once you make a repayment, that amount of credit becomes available to borrow again.
Credit-friendly: You may qualify for approval with a fair credit score. For example, Backd only requires a minimum FICO Score of 625, while traditional lenders often require 680 or more for term loans.
Negatives
Revenue requirement: Businesses with low revenue may not qualify for a business line of credit. For example, Backd requires businesses to have at least $100,000 in monthly revenue.
History required: Many business lines of credit — from Backd and similar institutions — require applicants to have established business credit with at least two years’ operating history. That means this isn’t an option for startups.
Lower credit limit: If you need to borrow an amount in the millions, then this is likely not the right option for your business.
9. Working Capital Advance
A working capital advance provides a lump sum of cash upfront and is typically repaid through frequent, regular payments. You can secure between $10,000 and $2 million in funding through lenders like Backd. The funds can help you launch short-term projects or cover seasonal cash flow gaps.
Positives
Better cash flow management: You can manage gaps in your cash flow caused by slow periods and unexpected bills.
Fast funding: Businesses can secure funding quickly with minimal wait times between steps. For example, applying with Backd takes just three minutes, and your funds could be available in as little as 24 hours.
Seasonal flexibility: Working capital advances can greatly help businesses that receive most of their revenues during peak periods.
Negatives
Eligibility requirements: Startups may not qualify for a working capital advance. For example, with Backd, applicants must have established business credit, a brick-and-mortar address based in the U.S., and at least one year in operation to qualify.
Frequent repayments: You will often need to make daily, weekly, or semi-monthly payments, which means that working capital advances are best for businesses that have an expected cash flow injection for paying back what they borrowed.
Potential for over-reliance: Some businesses may rely too heavily on funding from working capital advances, particularly when used for long-term projects.
10. Revenue-based financing
Revenue-based financing (RBF) packages closely resemble many of the characteristics of merchant cash advances. You receive a lump-sum payment and then you repay an agreed percentage of your revenues at set intervals.
However, unlike merchant cash advances, you can borrow against your average monthly sales, not just sales made on debit or credit cards.
Like MCAs, you can borrow a multiple of your monthly turnover, and you pay a factor rate, not an interest rate. RBF advances are more suitable for SaaS, subscription, e-commerce, and direct-to-consumer businesses, or fast-growing startups.
Positives
Flexible repayments: You only repay a portion of what you actually earn each month, which helps protect cash flow during slower periods.
No equity loss: You keep full control of your business as RBF lenders don’t require you to give away your shares or board seats.
No fixed repayment schedule: There's no set deadline for repayment. As revenue ebbs and flows, your repayment amount adjusts.
Negatives
Not suitable for all business models: RBF is only available to companies with predictable monthly revenue. Startups, seasonal businesses, or those with irregular income may struggle to qualify.
Intensive repayment schedule: If your factor rate is high, you may pay back more for your funding over a shorter period of time, putting pressure on your cash flow.
Viability issues: If your margins are tight and your revenue drops, repayments may outpace your income — delaying profitability, deepening your losses, and putting your business at risk.
Traditional Financing vs. Alternative Lending
Alternative lenders — such as peer-to-peer lending platforms, invoice factorers, and online lenders like Backd — differ from traditional financing solutions offered by credit unions and banks in several ways. Below, we’ve highlighted their key differences when it comes to:
Approval and funding speed
Eligibility and flexibility
Interest rates and fees
Approval Process and Speed of Funding
Traditional financing: These options often involve extensive paperwork, collateral, credit checks, and a lengthy approval process. It may take weeks or even months to receive the funding.
Alternative lending: When you opt for an alternative financing package, you may get a more flexible and faster approval process from your lender with less stringent criteria, reduced paperwork demands, and no collateral required. For example, the application process with Backd takes a few minutes, and approval is possible within just 24 hours — no personal guarantees or collateral needed.
Eligibility Requirements and Flexibility
Traditional financing: Banks and credit unions often have stringent criteria, like requiring higher credit scores, an established financial history, and personal guarantees. Traditional options may also come with restrictions on how you can use the loan.
Alternative lending: Many alternative finance providers, like Backd, feature eligibility criteria that are more accessible, like a credit score of at least 625, established business credit, and 1-2 years in operation.
Interest Rates and Fees
Traditional financing: Traditional loans may offer lower interest rates, but they also have higher upfront fees with strict late payment penalties and much longer approval time frames.
Alternative lending: Interest rates are sometimes higher for alternative lending, but in exchange, you get faster approvals, increased flexibility, and more favorable application criteria.
How to Pick the Right Alternative Financing Option for Your Firm
To choose the right alternative finance package for your business, consider the following:
Urgency: If you need cash fast, working capital advances and business lines of credit from online lenders will offer you the quick turnaround you need.
Poor credit: If your personal or business credit isn’t strong, accounts receivable financing (invoice factoring) or crowdfunding may be suitable, but the payout won’t be immediate.
Tight cash flow: Business lines of credit can provide you with available capital in quiet months or when you need to stock up on inventory to be ready for seasonal peaks.
Startups and new businesses: Crowdfunding, angel investment, and early-stage grants are viable options for companies under two years old. Merchant cash advances are an option for companies older than six months, but they do come with considerable risks.
Unexpected bills: To cover day-to-day costs like wages, inventory and utilities when you’ve got a large invoice to settle, working capital advances and business credit cards can tide you over.
Growth planning: If you're expanding, launching a new product, or investing in infrastructure, SBA loans or equity funding offer larger borrowing amounts with structured repayments or no repayments at all.
Choose an Alternative Financing Option From Backd
Alternative finance has grown so quickly in recent years because many businesses can’t afford to wait weeks for a loan. Many are also concerned that they can’t access lending and other business financial services because of the stringent requirements.
Backd offers two competitively priced funding options for businesses with a minimum credit score of 625 and a monthly revenue of $100,000:
Working capital advance: Access between $25,000 and $2 million (minimum one year in business required).
Business line of credit: Borrow between $50,000 and $750,000 (minimum two years in business required).
To be eligible for our lending solutions, you must be based in the U.S., have established business credit, and have a brick-and-mortar address.
Apply now and be funded within as little as 24 hours.
