6 Alternative Financing Solutions for Businesses (Plus 2 Bonus Options)

by Kieran Daly

April 17, 2023

6 Alternative Financing Solutions for Businesses (Plus 2 Bonus Options)

Seeking a bank loan for your business can come with a long list of eligibility requirements, and the process might take too long. As a result, more and more business owners are opting for alternative financing solutions instead, like peer-to-peer lending, invoice factoring, crowdfunding, and revenue-based financing.

In this article, we cover some of the most popular flexible and accessible funding options available.

1. Peer-to-Peer Lending (P2P Lending)

Think of P2P lending as an online finance marketplace. You compete for the attention of the private lenders and mainstream financial institutions looking for somewhere to invest their money.

You can upload your business plan to one of these crowdfunding platforms and explain how much you need to borrow and why. If the lenders like your plan, they’ll let you borrow money. But beware, you only get the finance you need if you raise the amount you ask for in full.

Positives

Easier to obtain: Many borrowers find the simpler and less stringent application process for P2P financing easier than applying for traditional bank loans.
Fast funding: It can take as little as three days to a week to get the financing you need on a P2P platform.
Investor first, customer second: You can run social media campaigns to promote your proposal and build up momentum. You may find investors get so enthused by your business that they become customers too.

Negatives

Higher interest rates: Higher interest rates are the norm in P2P lending because you don’t have to put up collateral.
Variable rates: Interest rates are also variable, meaning that your monthly payments could go up depending on what the Fed does.
Not for everyone: Many P2P lenders require borrowers to have a minimum credit score, and some don’t lend to specific sectors or startups.

2. Accounts Receivable Finance

Accounts receivable financing (often called invoice financing or factoring) is another alternative financing solution. They’re like loans you take out on outstanding invoices.

Instead of waiting for customers to pay you, sell your invoices to the factoring company. They then advance you a lump sum based on a percentage of the invoice amount, typically between 70% and 90%. You get the rest, minus the factoring fee, when your customer finally settles up.

Please note that this type of alternative lending is only available to businesses selling to other businesses or government bodies, not consumers.

Positives

Flexible funding: In the past, factorers wanted all your accounts receivables. Now, many of them let you pick and choose the invoices you send to them.
No credit score requirement: Invoice factorers are concerned about your clients’ credit scores, not yours.
24-hour funding: You can send your invoice to the factorer one day and get paid the next.

Negatives

Costly: A combination of fees and interest on outstanding invoices can make factoring expensive.
Credit control issues: You may have a falling out with some customers if your factorer chases overdue invoices too hard.
Onerous terms: Some invoice financing companies make you personally responsible for invoices they can’t collect on if your business fails.

3. Merchant Cash Advances

With a merchant cash advance, you get a lump sum based on the volume of sales you make via credit and debit card. Your lender then takes a percentage of your daily card sales until the loan is paid off.

Positives

Fast funding: You can get the business financing you need in as little as 24 hours.
No collateral: 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 sales you take on cards. So, if business is slow, you pay less.

Negatives

High cost: Factor rates can be as high as 30% or higher, so borrowing $50,000 might cost you $65,000, even if you repay the loan quickly.
Cash flow: Because of how much lenders take daily, you risk insolvency if you operate on narrow margins and suffer a prolonged dip in turnover.
Restricted access: If you don’t take the majority of your payments by card, your loan application won’t be approved.

4. Small Business Administration (SBA) Loans

SBA loans are loans guaranteed by the Small Business Administration (SBA). The SBA is the main U.S. government agency that supports small businesses and entrepreneurs. The two most popular types of loans are the SBA 504 and the SBA 7(a).

They are popular alternative financing solutions for small business owners seeking loan amounts of up to $5.5 million. Each type of SBA loan is different, but they share the following positives and negatives.

Positives

Competitive terms: Get access to lower interest rates and longer repayment terms than traditional financing.
Credit-building: SBA business lending is easier to obtain than bank loans. Plus, if you manage your account well, you could see your credit score improve.
Versatility: SBA loans can be used for various purposes like purchasing real estate, refinancing more expensive existing debt, working capital, and buying equipment and machinery. Just make sure you apply for the right type of loan.

Negatives

Slow: It usually takes a couple months to get SBA small business loans.
No guarantee: The SBA might love your plan, but they can’t force a partner bank or credit union to approve your business funding application.
Down payment: You need to have 10% or more of your total project or plan cost in cash before you apply.

5. Angel Investors and Venture Capital

Many people confuse the two, but angel investors and venture capitalists are different.

Angel investors are there for startups and early-stage businesses. They hope then to add enough value to your business so that they can sell their stake to venture capital firms in 2-3 years’ time. Venture capital firms then go for hypergrowth in the next 2-3 years so they can sell their stakeholding to a private equity firm for a big profit.

Positives

Assistance: Both angel investors and venture capitalists help you along the way, sharing their know-how and connections.
Cash-rich: Angels and venture capitalists can access their own funding plus additional capital from non-bank financial institutions and other alternative lenders if necessary.
No repayments: Unlike with both standard and alternative loans, you don’t make monthly repayments to your angel or venture capital firm. Some do take bonuses and dividends along the way though.

Negatives

Equity dilution: Their help and money don’t come for free. You have to give up shares in your company. They may also want a seat on the board to have some control over the company's direction.
Lots of pressure: You’ll be expected to deliver results for your investors. If you don’t, you might actually be fired.
Very rare: There’s a lot of competition for angel and venture capital cash, expertise, and connections, so your business plan and leadership team will have to be exceptional.

6. Credit Card Funding

A popular alternative finance option, especially among bootstrappers, is credit card funding.

You can use a business credit card to pay for inventory, equipment purchases, and day-to-day operational costs. They’re expensive but handy to have if you have temporary cash flow issues.

Your card provider gives you a limit — that’s the maximum amount you can spend on your card. Then, you pay interest on your balance. If your balance is zero, you pay no interest.

Positives

Easy access: There are lots of options on the market, so for most companies, a credit card should be relatively easy to obtain.
Rewards: Many providers now offer cash back and/or discounts on office purchases, software, and more.
Credit-building: Just like with SBA loans, getting a card and managing it correctly can boost your business credit score.

Negatives

Limited funding: You won’t be able to borrow as much with a credit card as you would with a loan in most cases.
Short-term funding: Your provider can stop your card and demand full repayment at any time they want.
Personal guarantee: You may be chased personally for an outstanding balance if your company closes.