Best Alternative Business Loans For Small Businesses

Best Alternative Business Loans For Small Businesses

If you have a small business and you don’t meet the requirements for traditional bank loans but you need funds to run your business or purchase equipment, you should consider alternative business loans. These types of loans are more flexible with their requirements. Particularly in terms of credit score. They also have an easy application process and you can usually access funds quicker than if you go the traditional route. In this article, we’re going to talk about different alternative business loans for small businesses, the process of applying for a loan, and the requirements.

What Are Alternative Business Loans?

First of all, let’s talk about what are alternative business loans and what alternative lending means. If you are an individual with a small business that cannot get funding from banks or other traditional lenders, you have the ability to access faster funding options online if you meet the qualifications.

The funds, in this case, are provided by alternative lenders who are more open to give funds to small businesses. These lenders usually provide niche financial services for small businesses in particular. Moreover, small business owners can get approved and access funds fast. Sometimes it takes just a business day to receive funding.  

How To Choose An Alternative Loan For Your Small Business?

Not all alternative loans work for every small business. There are many factors to consider before applying for an alternative loan. First of all, you have to know why you need the money. Secondly, you have to check the requirements of different alternative lenders to see if you meet them. Lastly, like with any other loan, make sure that you can pay back the money.

Here are the key factors you should consider before applying for an alternative business loan for your small business:

  • How long you have been active  – this requirement differs from lender to lender but most alternative lenders want your business to be active for a certain amount of time before lending to you;
  • Credit score – alternative lenders take into consideration credit score but their requirements are not as strict as those of traditional lender. Typically, the Credit Score Requirement requirements of alternative lenders are more permissive than the ones of traditional lenders and you can get a loan even if you don’t have a perfect credit score;
  • Cost of capital – For any loan the lender takes into account the rate of return. If you get a loan, you should be sure about the total amount of money you’ll need to cover everything and how long it will take you to do it before applying;
  • When you receive funds – Even though for most alternative loans you receive money faster than with traditional loans, you have to check how much time you have to wait to get approved and then how long it takes from approval until you receive the money.

Types Of Alternative Business Loans

Now let’s go through the different types of alternative loans for small businesses. They are all different in terms of potential uses and qualifications. Also, there coast of capital, requirements, and all the main factors we discussed above are also factors to consider before deciding on a loan.

Short-term Business Loans

This type of alternative business loan is easy to get access to, it can provide funds quickly, and it has a short repayment term. Typically, you have to be able to pay the money back in a few months. But the term can be 36 months if you applied for a bigger loan.

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With short-term business loans, you should expect a high annual percentage rate. The rate can range from 10 to 100%.

Loan Amount    

>$500,000

How fast you get the money      

1-3 business days

Loan Requirements

Business age: 9-12 months minimum

Credit Score Requirement: 550 minimum

Business Revenue Needed To Apply: over $25,000 and, in some cases, over $40,000 or even $50,000

Repayment Period: 3-18 months

Who Should Apply For A Short-term Loan?

Generally speaking, short-term loans are good options for those who need money fast, don’t have a perfect credit score, and are able to pay back the money fast. Most small businesses opt for this loan option when they need to invest in inventory fast or they lack money for payroll payments due to delays in receiving money from clients.

Short-term Loan Terms

Even though some lenders have a 36 months period for paying back the money, most require less than a year for the payment. As for percentage rates, they vary from 10% to 135%. In some cases, there is also an origination fee for the loan (up to 6%).

How To Apply For This Type Of Loan

To apply for this type of loan, you can submit your application online on the lender’s website. Some lenders require access to your bank account to speed up the process and get you approved faster. Typically, besides the online application, you have to submit personal documents as well as business documents. The list of documents can include:

  • Bank statements;
  • Personal tax returns;
  • Business tax returns;
  • Profit & loss statement;
  • Up-to-date balance sheet.

Medium-term Loans

Medium-term alternative business loans are similar to the short-term loans, except, as you probably figured out, the repayment terms are different. On top of that, these loans have different credit score requirements (you need a better score than for a short-term loan)and longer-term in business. However, the annual percentage rate is also lower and, considering the longer terms, the monthly payments are also lower.

Loan Amounts  

$250,000-$300,000

How fast you get the money      

3-7 business days

Loan Requirements

Business Age: 12 months minimum

Credit Score Requirement: 600 (sometimes 650) minimum

Business Revenue Needed To Apply: over $25,000 and, in some cases, $50,000

Repayment Period: 3-36 months

Who Should Apply For A Medium-term Loan?

If you’re in business for over a year and you have a credit score over 600, you should consider a medium-term alternative business loan because you’ll have a more time to pay the money back and a lower percentage rate to pay. This type of loan is great for those who are looking to invest in equipment or to expand their business.

Medium-term Loan Terms

Of course, rates vary by lender, however, the average rate is 10-40%, definitely better than in the case of short-term loans. You also have more time to pay the money back. Depending on how much money you lend, the repayment term can be between 1 and 5 years.

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How To Apply For This Type Of Loan

The process for this type of loan is similar to the one of the short-term loan. You have to go to the lender’s website and file an application. After you send the application, you can get prequalified for the loan in a just a few minutes. Then you can submit the required documents and wait for the approval. It usually takes 1-3 business days until you are approved.

Documents you may have to submit:

  • Personal tax returns;
  • Business tax returns;
  • Bank statements;
  • P&L statement;
  • Up-to-date balance sheet.

Invoice Financing

Invoice financing is a type of loan for those who own B2B or B2G businesses. Invoice financing basically converts the invoices that are due in the next 1 to 3 months into cash for the business. You can expect up to 70-80% of the invoice to be paid by these alternative lenders. From the residual 20-30%, the lenders get a fee and then the rest of the funds get to your account.

Loan Amount    

The maximum loan can vary greatly. But it can be anywhere between $100,000 and $5 million, depending on the lender.

How fast you get the money      

1-3 business days

Loan Requirements

Business Age: 3-6 months minimum

Credit Score Requirement: 530 minimum

Business Revenue Needed To Apply: $1000-$5000 outstanding invoices

Repayment Period: up t0 90 days

Who Should Apply For Invoice Financing Loan?

Invoice financing is a great perfect choice for B2B or B2G businesses with outstanding invoices. It’s a great solution for those who are in need of immediate cash and expect to receive money from a client. It’s also a pretty good solution for those who don’t have a good credit score.

Invoice Financing Terms

The financing amounts you can receive depend on the outstanding invoices you include in your application. Typically, you are charged a discount rate per invoice. The rate can range between 0.20% to 0.75% per week. Paying back the money doesn’t take long. Repayment goes over 90 days only if your client doesn’t pay the invoice on time.

How To Apply For This Type Of Loan

Companies that offer invoice financing usually connect to your bank account or accounting system and analyze the outstanding invoices. After doing that, they determine which invoice or invoices qualify for financing. Then, from their selection, you can choose what invoice you want the company to pay for.

The documents list includes:

  • Bank statements (typically for 3 months);
  • Accounts receivable or permission to access your accounting software.

Inventory Financing

As you can probably tell from the name, inventory financing is an alternative loan you can get in order to buy inventory. To secure the loan, you use your existing inventory, bought inventory or any other business assets you have available. This type of loan is convenient for small business owners, particularly B2C and retail business owners because it is cheaper than short-term loans.

Loan Amount    

$250,000-$10 million

How fast you get the money      

1-7 business days

Loan Requirements

The requirements for this type of loan are not always very clear. Although, in most cases, you need to have a positive balance, to open for at least a year, and to have two years of credit history minimum.

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Who Should Apply For An Inventory financing Loan?

Retail business, wholesale businesses, start-ups, and small businesses that sell directly to consumers can apply to get an inventory financing loan. These loans are useful to those who need to increase their inventory quickly to prepare for holidays, Black Friday, and other busy periods.

Inventory Financing Terms

For this type of loan, lenders generally charge up to 3% of the outstanding loan amount per month. The normal repayment status usually lasts between 1 and 6 months.

How To Apply For This Type Of Loan

The online application is done on the lenders’ websites and it usually takes just a few minutes to complete. The loan is approved in less than a week.

Revenue-based Financing

For revenue-based financing, you pay a percentage of your revenue instead of a fixed amount decided when you get the loan. Since this type of loan is customized for each business’s situation, it is great for small businesses that have high growth margins.

Loan Amount    

$50,000 to $3 million or a percentage of your annual revenue

How fast you get the money      

15-30 days

Loan Requirements

Gross Margin Required: 50%      

Business Revenue Needed To Apply: $15,000 per month

Repayment Period: up to 5 years

Who Should Get A Revenue-based Financing Loan?

If you have a fast-growing business with more than 50% margins, you can get a revenue-based loan. Your income needs to be recurring and predictable to be accepted for this type of loan. Revenue-based financing is not only a great alternative to traditional loaning but also to venture capital investors. These loans are great because they provide growth capital right away in exchange for a percentage of the future revenue of the company.

Revenue-based Financing Terms

Usually, with revenue-based financing you can get up to $3,000,000, however, your loan cannot be more than 3-6 times more than your monthly revenue. The repayment is typically a percentage of your monthly revenue that’s determined before getting the money.

How To Apply For This Type Of Loan

After completing an online application, you will set up a phone call or a meeting with a lender representative. Your finances and funding needs will be assessed by this person. The same person will probably analyze your bank statements and determine if you are approved for the loan or not. If you are approved, you will be communicated the loan amount and the repayment terms.

Equipment Financing

If you want to take a loan to purchase equipment, vehicles, and other tools needed to grow your business, you should consider equipment financing. This loan is similar to the medium-term loan but the credit score requirements are usually lower. You can also get lease if you want. This will give you more flexibility with monthly payments.

Loan Amount    

$100,000-$150,000

How fast you get the money

1-3 business days            

Loan Requirements

Business Age: 3-6 months minimum

Credit Score Requirement: 620-650, sometimes even lower

Repayment Period: 2-6 years

Who Should Apply For A Equipment Financing Loan?

To apply and get approved for an equipment financing loan, you have to be a startup or small business that needs equipment in order to develop your business. The equipment serves as collateral so even if you’re not in business for a long time or you don’t make a lot of money, you can still get approved.

Equipment Financing Terms

Typically, the interest rate for an equipment loan starts at 6%. Repayment terms can vary based on the loan amount. Generally, you’re looking at 2-6 years. You should be prepared to make a down payment just in case because some lender companies require that.

How To Apply For This Type Of Loan

You can apply online and get preapproved. After this step, you’ll have to be able to provide a few documents including:

  • Business tax returns
  • P&L statement
  • Current business balance sheet
  • Proof of business licenses

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