Piggy banks stacked on books

The Insider’s Guide to Alternative Lending

10+ min read • Oct 05, 2019 • Grant Olsen

The old system of lending is inadequate for today’s business world. According to research from the SME Finance Forum, small businesses face major funding shortages. Last year, businesses needed about $5 trillion that institution-based financing was unable to provide.

Anxious to find new solutions for their financing needs, small business owners have increasingly turned to alternative lending as an easier source of money. Right off the bat, they usually notice higher approval rates and more robust resources.

“Loan applications from microbusinesses and small businesses are commonly rejected by traditional financial institutions,” says Business Insider. “Due to the looser regulations for alt lenders, they can capitalize on the high demand of smaller businesses […] Alt lenders have the ability to leverage a broad set of data and machine learning—allowing them to reach further into the small business lending market than incumbent banks.”

The Benefits of Alternative Lending

While institutional bank lending has been around for centuries, alternative lending is the new kid on the block. At its core, alternative lending is any type of financing that doesn’t follow the traditional structure of the aforementioned banking system. So rather than driving to your local bank, waiting for a loan officer to meet with you, and then beginning the tedious slog of applying for a loan that probably has a low approval rate, you can fire up your computer and submit an application from the comfort of your couch.

Online lending platforms have changed the game by connecting small business owners with a wide array of financing options. The lenders that participate in alternative lending are familiar with small businesses and willing to work with them. Traditional banks, on the other hand, often view small businesses as risky ventures. On top of that, the lower value loan amounts commonly sought by small businesses don’t make as much money for banks, further depleting their willingness to play ball.

Here’s a closer look at some of the key benefits you’ll find with alternative lending:

1. Bigger Selection

Every small business is different, so it stands to reason that cookie-cutter financing usually won’t be a comfortable fit. Alternative lending provides more diverse options courtesy of lending marketplaces like Lendio that gather more than 75 lenders from around the country. Ample options are essential when it comes to finding a loan that works seamlessly with your business operations and style.

2. More Acceptance of New Businesses

When lenders receive an application, their first question will be whether or not they can trust the borrower to repay the money. The problem for newer businesses is that they haven’t yet had the opportunity to establish a financial track record.

With alternative lending, borrowers connect with lenders that have more relaxed lending requirements. This flexibility means a company just getting off the ground can often find the financing it needs to really take flight.

3. Faster Application Process

While bank loans can drag on for months before providing you with a single penny, the lending platforms in the alternative lending industry deliver expedited options. You’ll often have simpler applications that require less documentation. And because these platforms use advanced technology, the underwriting process is much quicker, which provides faster results, with some loan decisions arriving in just 24 hours.

4. Faster Funding Process

Not only are the applications usually breezier with alternative lending, but the money hits your account sooner. This quick availability is a crucial detail because there are situations where small businesses owners need cash immediately, such as replacing a key piece of machinery, hiring new staff to meet seasonal demand, or taking advantage of an incredible new business opportunity that has suddenly presented itself.

Time is money, so any loan that provides faster funding is going to benefit your bank account. With some alternative lending products, you can actually get cash within just a few hours of approval from the lender. That’s right—you can have the money you need in less time than it takes to watch Titanic.

5. Better Odds of Success

While banks are infamously stingy with their loans, the vast majority of requests submitted through a lending platform are approved. This higher approval rate saves you time and money, as you’ll get faster access to financing and won’t waste precious time and resources on options with low chances for success.

6. More Flexibility 

Because banks are set up to handle massive loans for large corporations, they often don’t want to deal with the more conservative financial needs of small businesses. But when you need to borrow $6,000 to buy new refrigerators for your restaurant, you shouldn’t feel pressured to increase that amount just to appease the lender. You should find a lender that is happy to provide you with $6,000.

Alternative lending helps make this possible by connecting you with lenders of all shapes and sizes. Some are equipped to offer loan amounts worth millions of dollars, while others provide you with smaller loans tailored to your needs.

7. Better Technology

Traditional loans often require mountains of paperwork, but any lending platform worth its salt will allow you to quickly upload any necessary digital files. Plus, the very nature of alternative lending is geared toward borrowers and less stringent requirements.

From application to funding, an alternative lending platform is programmed to keep your data more secure and make your life easier. The fact that you can connect with a lender via your mobile phone would’ve seemed unbelievable to entrepreneurs a decade ago.

While these benefits certainly make a compelling case for alternative lending, it’s important to note that you may encounter a couple of disadvantages with some of the financing options found on a lending marketplace. First of all, the interest rates on some loan products may be higher than average. Carefully research your options to make sure you find lenders that offer competitive rates that work for your budget.

Also, the lending terms may be shorter for financing options on a lending marketplace. Terms between 1–5 years aren’t uncommon, while bank loans typically offer more time to repay the money you borrow. Shorter terms don’t necessarily mean you’ll pay more money in total, but they do mean you’ll pay more each month.

Getting a Loan Through a Lending Marketplace

Your first objective before seeking a loan is to figure out your plan for spending the money. The key elements of this plan are how much cash you’ll need and how quickly you want to see it in your bank account.

By identifying the size and timeline of the loan, you’ll be able to quickly narrow your options because many loans are structured in ways that could make them obsolete depending on your plan.

Here’s an overview for 11 of the most popular financing options available through lending marketplaces:

  1. SBA Loan: Beloved by entrepreneurs, these loans are unique because the Small Business Administration (SBA) guarantees a significant portion of the money you borrow. This guarantee encourages lenders to work with you even if your financial history is less than stellar. The loan amounts go up to $5,000,000, with generous terms similar to those found at big banks. The only downsides to these loans are that the applications require mountains of paperwork and the funding process can take up to 3 months.
  2. Business Line of Credit: Here’s a flexible option that provides amounts ranging from $1,000 up to $500,000. Rather than a lump sum, you can use this revolving form of credit whenever you want. The money usually becomes available in a couple of weeks and you can expect interest rates to start around 8%.
  3. Short Term Loan: When you need money and don’t have time to wait around for it, these loans can be lifesavers. You’ll often get the cash in just 2 days, allowing you to move quickly and address your business needs. The maximum amounts for short term loans hover around $500,000, while the interest rates start at 8%. Because everything is fast-tracked with these loans, don’t be surprised if the repayment term is as short as 1–2 years.
  4. Business Term Loan: While short term loans are built for speed and agility, these loans are more robust. You can get amounts up to $2,000,000, which ranks them among the largest of the loan world, and you can actually get that money in just a few days. Interest rates can be quite favorable, starting around 6%. And the repayment terms have more variance, sometimes stretching up to 5 years.
  5. Equipment Financing: As the name suggests, these loans are engineered to help you handle equipment needs. Whether you need to buy a new tractor trailer, repair a dump truck, or install new software on the computers in your office, you can get up to $5,000,000 to make it happen. The money moves fast, becoming available in as little as 24 hours. Also, the interest rates start at a borrower-friendly 7.5%.
  6. Merchant Cash Advance: While many loans are approved based on your past business performance, this financing lets you borrow against your business’s future earnings. So if things are trending upward, you should be a solid candidate for amounts ranging from $5,000 to $200,000. The good news is that the money can reach you in just 24 hours. The bad news is that interest rates start at 18% and may go even higher.
  7. Business Credit Card: If you’re like most Americans, you’ve got at least one credit card in your wallet right now, which means you’re already familiar with how a business credit card works as it’s remarkably similar to the personal version. Business credit cards provide you with a revolving amount as high as $500,000, with interest rates starting as low as 8%. The applications are light on paperwork and you can receive access to the money in 2 weeks.
  8. Commercial Mortgage: When you have property needs, consider a commercial mortgage. Whether it’s for a restaurant, warehouse, office, or retail space, these loans connect you with as much as $5,000,000. Interest rates can start at a pleasantly surprising 4.25%. It’s worth noting that these loans are asset-based, so the amount and rate you are approved for will be at least partially dictated by the property you will be using as collateral.
  9. Accounts Receivable Financing: This form of financing, also known as factoring, makes it possible to sell your receivables and purchase orders. Essentially, the lender gives you up to 80% of your receivables then goes through the trouble of tracking down your debtors and collecting the money owed. You can often get funded in only 3 days or so, with the factor rates starting at 5%.
  10. Startup Loan: Every good thing has to start somewhere, and this family of loans is designed to help make that happen for small businesses. Options include SBA loans, equipment financing, short term loans, lines of credit, and business credit cards. The amounts can go as high as $750,000, while the interest rates range from 0% up to 17%. One drawback is that the money can take as long as 3 weeks to reach you.
  11. Business Acquisition Loan: These loans can be as large as $5,000,000, with interest rates beginning in the neighborhood of 5.5%. Whether you want to buy an existing business or a franchise, this financing is ideal for making it happen. Just be aware that the funds may not be available for up to 4 weeks.

Tools of the Trade

As you narrow down your financing options and come closer to finding your ideal match, multiple resources are available to help you with your decision. Start with a loan calculator, which can help you identify the cost of each option. There are diverse pricing metrics to consider, but here are the 4 most commonly used to identify financing costs:

  1. Annual Percentage Rate (APR): This user-friendly metric reveals the yearly cost of your loan.
  2. Total Cost of Capital (TCC): By adding up all of the interest, fees on loans that don’t charge interest, and ancillary fees, you can get a fuller picture.
  3. Average Monthly Payment: It’s helpful to view the cost of a loan as it will impact your monthly budget.
  4. Cents on the Dollar: This concise metric breaks down how much you’ll pay in fees and interest for each dollar you borrow.

The problem is that not all lenders list these pricing metrics in the same way. Imagine if you were shopping for a new car. You have high hopes for a painless purchase, but soon discover that Toyota and Honda, your favorite manufacturers, list the pricing and gas mileage of their cars differently. In this scenario, it would be nearly impossible to line up comparables and make an informed decision.

The Innovative Lending Platform Association decided to take action to eliminate the ambiguity that sometimes plagues small business owners as they seek financing. The association partnered with some of the major players in the alternative lending industry to create a robust comparison tool called SMART Box™ (Straightforward Metrics Around Rate and Total cost).

When you use SMART Box, you’ll find that you’re better able to understand disclosure standards and access pricing metrics because it’s like a Rosetta Stone for small business loans. There are currently 3 different versions of the tool, customized for term loans, merchant cash advances, and lines of credit.

“Access to capital is a top priority for NSBA and we appreciate how SMART Box allows small businesses to more fully assess and compare lending options,” says Todd McCracken, president and CEO of the National Small Business Association. “This type of price transparency, along with best practices like the ones adopted by the Coalition for Responsible Business Finance (CRBF), will help solidify the trust between non-bank lenders and small businesses.”

Using tools like loan calculators and SMART Box is a proven way to get the best information for your business. By taking the time to do your due diligence, you’ll be able to make better decisions for your financing and protect yourself from unwelcome surprises down the road.

The alternative lending industry is leading the way when it comes to these types of helpful resources. And because of the focus the industry places on technology, all of the tools are available on your laptop or mobile device 24 hours a day. As every entrepreneur knows, small business hours are much different from standard business hours. So the ability to investigate a possible loan opportunity at midnight or submit an application at 2 a.m. is something that should be celebrated.


Grant Olsen

Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.