Alternative Lending Options: Finding the Top Non-Bank Business Loans

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Updated on Saturday, April 11, 2020

As of 2018, there was a $5 trillion gap between the funding needs of small and medium business and the traditional, institution-based financing available to them, according to the SME Finance Forum, which works towards expanding financial access for these businesses. This funding misalignment has helped alternative lending become a major new option.

The rise of alternative lending has been a boon for small business owners and other potential borrowers who are not necessarily a good fit for traditional lending and financing. That’s because alternative lending — financing from a non-traditional source — generally has less stringent requirements for borrowers, and it’s available for a wide variety of purposes.

What is alternative lending?

Alternative lending refers to any kind of financing from an external source that is neither a bank nor a stock or bond market. Most often, alternative lenders operate through online platforms, and they can offer a range of products, from term loans to merchant cash advances.

In general, alternative business lending has less stringent requirements than traditional institutions. A bank will generally require good personal and business credit, as well as a certain amount of time in business to extend a small business loan. In contrast, an alternative lender will likely have lower minimum credit score requirements and less strict requirements for time in business.

With fewer qualification requirements come higher approval rates. According to the Biz2Credit Small Business Lending Index, big banks (meaning banking institutions with more than $10 billion in assets) had a small business loan approval percentage of just 28.3% as of February 2020. Alternative lenders, on the other hand, approved 55.9% of small business loans in that same time.

In addition, the average closing period for traditional small business loans is 45 to 60 days. That’s the amount of time you will have to wait between turning in all parts of your initial application and when your funds are released to you. Traditional small business loans typically go through a multi-phase process before releasing the money, which is why they can take as long as 60 days to close. Loans from the Small Business Administration (SBA) can take even longer.

Many alternative lenders, on the other hand, can approve small business loans within one to three business days, or even sooner.

Types of alternative lending

Since small businesses have a variety of financing needs, it’s natural that alternative lending options include a number of different products to meet those needs. You can find the following types of loans through alternative lenders.

Term loans

A term loan is a lump sum that is borrowed all at once, and paid back over a specified term at a fixed interest rate. It’s what most people commonly think of when they refer to a business loan. The repayment term can last anywhere from just a few months to as long as 10 years, and sometimes even longer. The amount available to borrow depends greatly on the borrower’s creditworthiness and business profitability, as well as length of time in business.

Many small businesses seeking term loans will go through a traditional lender, since banks are generally able to offer longer terms and better rates than alternative lenders. However, alternative lenders do provide term loans that may be easier to qualify for.

Business line of credit

Unlike a term loan, which extends the full amount of the loan all at once, a business line of credit allows a small business owner to withdraw money up to an agreed-upon amount within the revolving credit line. Once the borrowed amount is paid back, the full amount is again available to borrow, similar to how a business credit card works.

This kind of product offers business owners a ready source of immediate funds. This can allow a business owner to hire as needed, purchase necessary supplies or even expand the company when an opportunity arises.

Equipment financing

Necessary equipment for running a business can be financially out of reach if you have to rely on making purchases in cash — that’s where equipment financing comes in. This kind of loan will help you purchase the equipment, even if you have a new business or short credit history.

Such loans will often use the equipment itself as collateral, which makes the loan easier to qualify for, though you do risk losing your equipment if you fail to repay the loan. The loan term will often be tied to the expected lifespan of the equipment.

Invoice factoring

Prolonged waits on invoiced payments can seriously affect a business’s cash flow. With invoice factoring, a business sells its unpaid invoices in exchange for a cash advance, typically 70% to 90% of the value of the unpaid invoice. The factoring company will then collect payment from your clients and send the remaining balance to you, minus a fee that it collects.

Merchant cash advances

Merchant cash advances are typically extended to businesses that rely on credit and/or debit card payments. This kind of advance provides you with a lump sum loan in exchange for a set percentage of daily or weekly credit card sales. You will continue to pay the daily or weekly percentage until the advance is repaid.

The amount you pay for a merchant cash advances is typically not based on an APR, however, but rather on what’s known as a factor rate. This rate, which can range from 1.2 to 1.5 (meaning 1.2 to 1.5 times the amount you borrow) can quickly get out of hand, however. If you calculate these factor rates as APRs, the APR you pay can range as high as 70% to 200%.

5 top alternative and non-bank lenders

To select the top five alternative and non-bank lenders we looked at a number of lenders. In addition to all being non-bank lenders, the lenders we chose had to meet the following criteria:

  • No more than two years in business required
  • Funding available in one to three business days
  • No prepayment penalties

1. BlueVine

Types of Loans OfferedLoan Amounts OfferedRateTime to Funding
Term loanUp to $250,000Starts at 4.80%Within hours of approval
Business line of creditUp to $250,000Starts at 4.80%Within hours of approval
Invoice factoringUp to $5,000,000Starts at 0.25% per weekAs fast as 24 hours

One of the big benefits of BlueVine is that it has no origination, prepayment, termination or maintenance fees. BlueVine’s term loans are available in 6– or 12-month terms, and you will pay a fixed weekly amount until the loan is paid in full. With the business line of credit, you will have 6 or 12 months to pay back your draw, with fixed weekly or monthly payments. You will pay a 1.6% to 2.5% draw fee every time you draw on your line of credit.

With invoice factoring, BlueVine provides 85% to 90% of the invoice amount upfront. Your customers will continue to make payments in your name, but the outstanding payments will go to the BlueVine account or P.O. Box and you’ll receive the remainder, minus BlueVine’s fees.

Both BlueVine’s term loan and business line of credit are available to any business that meets the following requirements:

  • Been in business for at least six months
  • Annual revenue of $100,000 or more
  • Personal credit score of 600 or higher

Businesses that cannot qualify for these loans may be eligible for invoice factoring, which requires only three months in business, monthly revenue of $10,000 or more and a FICO score of 530 or higher.

The business line of credit is not available in Vermont, and neither the line of credit nor the term loan are available in North Dakota or South Dakota. Invoice factoring is available across all states.

2. OnDeck

Types of Loans OfferedLoan Amounts OfferedRateTime to Funding
Term loan$5,000 to $250,000Starts at 35.10%Same day you are approved
Business line of credit$6,000 to $100,000Starts at 10.99%Same day you are approved

OnDeck has loaned out over $13 billion since 2007, making it one of the largest non-bank lenders. You can qualify for either a term loan or a business line of credit if you have:

  • Been in business for at least three years
  • A personal FICO credit score of 600 or above
  • Annual revenue of $250,000 or more
  • A business bank account

OnDeck promises instant funding as soon as you are approved. There are also no draw fees on the line of credit, unlike with BlueVine. However, you can expect to pay an origination fee for any kind of loan with OnDeck, as well as a $20 monthly maintenance fee for business lines of credit. You can potentially reduce your origination fee to 0% with subsequent loans though, and the monthly maintenance fee will be waived for six months if you make a $5,000 initial draw within five days of opening your line of credit.

3. Funding Circle

Types of Loans OfferedLoan Amounts OfferedRateTime to Funding
Term loans$25,000 to $500,0004.99% to 24.90%Within one business day after approval

Funding Circle has some of the more stringent guidelines for lending. To qualify for one of their term loans, you will need to have:

  • Been in business for at least two years
  • A personal FICO score of 660 or higher
  • No bankruptcies in the previous seven years
  • Located in an eligible state (Funding Circle does not operate in Nevada)

In addition, Funding Circle requires a lien on business assets and a personal guaranty from the business owner. However, there is no revenue requirement to qualify.

Loan terms can range from six months to five years, and your payment will be a fixed monthly amount. There are no prepayment penalties or maintenance fees, but you can expect to pay an origination fee of between 3.49% and 6.99% of the total amount borrowed. Additionally, there is a late payment fee of 5% of the missed payment.

4. National Funding

Types of Loans OfferedLoan Amounts OfferedRateTime to Funding
Term loan$5,000 to $500,000Not provided by lenderWithin 24 hours of approval
Equipment financingUp to $150,000Not provided by lenderWithin 24 hours of approval
Merchant cash advanceUp to $250,000Not provided by lenderWithin 24 hours of approval

National Funding has been in business since 1999, making it one of the oldest alternative lenders for small business. The lender does not specify its requirements for a term loan, but instead invites potential borrowers to fill out its application to connect with a loan specialist so that the lender can find the right loan for you. You won’t need collateral or a business plan to qualify, but you will have to sign a personal guarantee.

For the equipment financing loan, however, you will need to have been in business for at least six months, have a FICO score of over 575 and get a quote from a vendor for the needed equipment. Finally, any business that has been in business for at least a year and takes in at least $3,000 per month in credit card sales is prequalified for the merchant cash advance.

Though it is unclear how much you will pay in interest, National Funding focuses on offering a high approval rate, even to businesses with less-than-stellar credit. You can also receive early payoff discounts, as well as a variety of payment terms and options.

5. Kabbage

Types of Loans OfferedLoan Amounts OfferedRateTime to Funding
Line of creditUp to $250,0001.25% to 10.00% fee per monthWithin one to three business days

To qualify for a Kabbage line of credit, you only need to have been in business for at least one year, and take in $50,000 per year or $4,200 per month in revenue. There is no collateral requirement.

You may borrow from your line of credit in amounts as low as $500, all the way up to your limit. When you make a withdrawal, the money will show up in your bank account within one to three business days, or instantly in your Paypal business account. Each withdrawal is considered a separate loan, with a repayment term of 6, 12 or 18 months.

Kabbage’s interest rate is calculated monthly, which can mask how high an APR you are actually paying — according to ValuePenguin, the APR can range between 20% and 80%. The monthly fee ranges from 1.25% to 10.00%; however, there is no origination fee.

Pros and cons of alternative lending

Pros

There are a number of reasons why small business owners might choose to borrow with an alternative or non-bank lender. Benefits of alternative lending include:

  • Easier to qualify: With fewer and less stringent qualification requirements, alternative lending opens up funding opportunities for small business owners who may not otherwise be able to get the financing they need, especially if their credit is not excellent.
  • Rapid approval and funding: Alternative lenders approach the underwriting process differently from traditional lenders, which means they can both approve loans and release funds more quickly. This means small business owners can get the money they need when they need it.
  • Available to new businesses: Though traditional funding sources generally require a long history of profitability before extending a small business loan, alternative lending options will consider newer businesses for loans.

Cons

However, even though there are a number of excellent reasons to consider an alternative lender for small business financing needs, there are still some alternative lending hazards to beware of. This includes:

  • Confusing interest rates and fees: It can be difficult to compare apples-to-apples when it comes to alternative lending rates, since each lender uses its own methodology for calculating rates rather than clearly stating APRs. In addition, it can be difficult to determine exactly what and how much you will be paying due to additional fees, such as origination fees and draw fees, depending on the alternative lender you choose.
  • Shorter repayment terms: Alternative lenders often offer shorter repayment terms than traditional lenders. This helps to mitigate the risk to the lender, but it also means higher monthly payments for the borrower.
  • Less flexible payment options: Many alternative lenders require daily or weekly repayment, fixed repayment amounts or automatic ACH payments toward your loan. If your business has any cash-flow difficulties, this could cause some further financial problems.

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