Alternatives to Getting a Small Business Loan at a Bank

Banks may be one of the most popular sources of financing, but they aren’t the only option for getting a small business loan. You can get small business loans from credit unions or online lenders, or you could go with alternative forms of financing like SBA microloans or invoice financing.

Why go with an alternative? Banks tend to require strict eligibility requirements like two years in business and strong credit. If you don’t meet those requirements or need fast funding, you can still find alternatives to bank business loans elsewhere. Look at these top alternatives to make the right decision for your business.

SBA loans

The Small Business Administration designed its SBA loan programs to help small businesses get access to business financing. It offers affordable interest rates capped by the SBA and long repayment terms like 10 years for working capital uses.

But SBA loans from a bank often have tight lending criteria similar to conventional business loans. For businesses that don’t qualify, the SBA does offer these options intended for disadvantaged business owners:

SBA microloans

The SBA microloan program serves at-risk communities and businesses that don’t qualify for traditional business loans. It’s characterized by its small loan sizes of up to $50,000, allowing for repayments as long as seven years. You can use the loan for working capital expenses, buying inventory or buying equipment, though you can’t use the microloan to refinance debt or to buy real estate. You can find these loans through the SBA’s approved list of microlenders, usually nonprofits.

SBA Community Advantage Lenders

The SBA Community Advantage loan pilot program ended on September 30, 2023, but borrowers can still work with mission-focused Community Advantage Small Business Lending Companies for 7(a) loans up to $350,000. These lenders may operate as Certified Development Companies (CDCs), Community Development Financial Institutions (CDFIs) or SBA-approved microlenders, and their SBA loan portfolio must be at least 60 percent in underserved communities.

Credit unions

Credit unions are not-for-profit institutions. Instead of stockholders, a credit union’s members own and control the organization. This can lead to credit unions offering lower interest rates or fewer business loan fees than you might find with banks. But you’ll need to be a member.

Membership requirements can vary between credit unions. For example, Navy Federal is one of the largest credit unions in the U.S. But to join, you’ll need to be an active servicemember, veteran or an immediate family member.

Other credit unions have membership requirements that make it easy for just about anyone to join. For example, Affinity Federal Credit Union first requires you to be an employee of a participating business or be a member of a participating association or club like the Affinity Foundation.

Alternative lenders

Most businesses rely on banks or credit unions to get business loans. But there are also alternative lenders, which are usually online-based businesses with a digital application and loan approval process. These lenders may use technology to determine whether you’re eligible for a loan, and they often offer lenient eligibility requirements compared to banks.

But online lenders often have lower loan maximums and may charge very expensive rates for applicants who need a bad credit business loan. On top of short-term loans, alternative lenders offer other types of business financing, like lines of credit, invoice-based loans and merchant cash advances.

Business lines of credit

A business line of credit is a flexible source of funds for your company. When you’re approved for a line of credit, the lender will set a credit limit that you can draw from.

You’re free to draw funds from the line of credit up to that set limit. You only pay interest on your outstanding balance, and you can leave the balance at $0 if you don’t need funds at the moment. As you pay back any withdrawals, the credit limit replenishes, allowing you to withdraw from the credit line again as needed.

This makes a line of credit very useful for covering unexpected, short-term expenses. But business line of credit interest rates can be higher than term loans. If you carry a balance, you could wind up paying a lot in interest.

Peer-to-peer lending (P2P)

Peer-to-peer lending involves borrowing money from individual people rather than traditional lenders like banks and credit unions. Usually, borrowers and lenders work through a platform like Kiva or LendingClub where borrowers can apply for loans, and people can invest their money into those loans.

The benefit of peer-to-peer lenders is that they offer easier qualifications, allowing you to qualify even with no or poor credit and low revenue. The drawback is that rates and fees can be much higher for peer-to-peer loans than conventional or online loans if you have bad credit.

The drawback is that rates and fees can be much higher for peer-to-peer loans if you have bad credit. They may also charge higher fees.

Invoice financing

If your company finds itself waiting on customers to pay the invoices you submit, you may turn to invoice financing to get cash quickly.

With invoice financing, you use the money you’re due based on the invoices you’ve submitted as collateral to get a loan. The lender will give you cash upfront with a set repayment plan and interest rate. As you get paid for those invoices, you can repay the debt.

Invoice factoring

Invoice factoring also uses the invoices to determine eligibility and how much funding you receive. What makes it different is that the factoring company actually buys your invoices from you. When your customer pays the invoice, the money goes directly to the factoring company rather than you.

The factoring company buys your invoices for between 70 and 90 percent of their face value, giving it room to make a profit. The company will then take out its fees and return any extra money to you once clients make good on the invoices.

Merchant cash advances

Merchant cash advances (MCAs) are an option for companies that make a lot of sales through debit and credit card purchases. With an MCA, the lender gives you a lump sum of cash. You then repay that loan through a percentage of your future card-based sales.

For example, a lender might give you $10,000 with a 1.15 factor rate and demand 10% of your sales until the loan is paid back. That means until you’ve paid back $11,500, you’ll have to give up 10 percent of your revenue either daily or weekly.

They’re useful for companies because they don’t require great credit and can be a quick source of funding. But there is little regulation regarding MCAs, and the rates that MCA companies charge can be quite high. Due to the high rates and aggressive daily or weekly repayments, you can easily get trapped in a cycle of debt until you make enough revenue to pay back the loan.

Equity financing

Many small business owners turn to equity financing to finance building or expanding their business without going into traditional debt. Equity financing involves getting funding from investors, usually by giving away ownership of your company.

But to get approved, investors want to know your strategy for growing the business. As part-owners, they may also have control over how the business runs and decision-making. These investors understand the risk of funding your business but expect high returns once your business starts turning a profit.

You can get equity financing through:

• Angel investors: Individuals that provide financing and mentorship
• Venture capital firms: Financial organizations made up of investors aiming to finance high-potential startups
• Initial Public Offering (IPO): Releasing shares of your company to the public as an entry into the stock market

Grants

Grants are cash awards that you don’t have to repay as long as you qualify for them, giving you a great alternative to business loans from a bank. Depending on the terms, you might have restrictions on how you can use the money or be free to spend it however your business wishes.

There are many places to look for grants. Many local or state organizations and federal agencies offer grant programs that you can apply to. There are also privately run grant programs funded by businesses or non-profit organizations.

Eligibility for these grants will vary. You may want to look for grants in your industry or within community to increase your chances of getting the grant. Many non-federal grants are aimed at helping underserved groups that have historically lacked access to business financing, such as:

Crowdfunding

Crowdfunding is a way to raise money from everyday people rather than a traditional lender. You’ll need a strong community network to make this form of financing successful or have a product that generates a lot of excitement. There are four primary types of crowdfunding:

Bootstrapping

Bootstrapping is the act of starting a business using personal resources like savings or borrowing from friends and family. The term comes from the idea of “pulling yourself up by the bootstraps.” This phrase means that business owners will put in time and effort to make their business successful.

Bootstrapping is also characterized by limiting business expenses and using personal equipment when necessary to get the job done. Bootstrapping is beneficial because it keeps costs low and is an alternative to getting a business loan before you can establish revenue.

When to choose a bank business loan alternative

There are a few good reasons to explore alternatives to bank loans, including:

• You don’t meet eligibility requirements for a bank loan
• You need fast funding
• You can get better repayment terms or interest rates with an alternative
• You get more flexibility in how you use the funding
• You want to avoid debt

Bottom line

If you want to get a small business loan, looking beyond loans from a major institution to alternative business loans may pay off in the long run. While traditional loans from big banks have strict requirements, alternative lenders and funding sources introduce solutions for new businesses or those with subprime credit.

These alternative lenders and loan options may speed up the approval process, helping you make quick purchasing decisions or take advantage of a time-sensitive opportunity. They may also offer flexibility with how you use the funds. But make sure to think through all your options to make the best decision for your business.