The Growing World of Alternative Small Business Lending

These days there’s nothing traditional about small business financing. You see, the credit crunch of 2008 created a lending gap: Traditional banks want to loan a half-million dollars or more, but most small businesses only need $250,000 or less.

Traditional lenders rarely look twice at a small business any more, and when they do, only 20% of applications pass muster. These are not very encouraging numbers for small business owners who want to take it to the next level sometime this generation.

What’s a small business owner to do? SBA-backed loans are still the most affordable, but they take forever to process, require a back-breaking pile of paperwork, and are only given out to a very select few since the rules are so strict.

Luckily, nature abhors a vacuum. To fill in the gap, the list of alternatives is growing all the time, which is both a good thing and a bad thing, depending on how well you handle a headache-inducing list of options. Lines of credit, term loans, factoring, merchant cash advances, invoice financing—look, it’s great to finally have choices, but it all sounds like synonyms for “out of my league.” So how do you know what’s right for your business? Glad you asked.

Let’s start with online, also known as alternative, lenders. If an established business can show it is growing successfully, an alternative lender will often provide an infusion of capital to keep up the momentum because they believe in the company and its owner. Since you are not dealing with a bank, but a company that is lending its own money, their analyses and criteria are very different from a bank’s.

It’s also faster and easier to get approved than it would be at a traditional bank, though neither the fastest nor the easiest. Their offerings range from term loans to lines of credit, inventory financing to receivables factoring.

If you want something even faster and easier, consider daily debit or merchant cash advances (MCAs). An MCA lender gives the owner a pile of cash in return for a percentage or flat amount of the business’s daily sales. The great part is how quick they are, and they are even less stringent than online lenders that offer more traditional financing options like term loans and lines of credit. The not-so-great part is the extremely high rates you pay for your money. Also, if your income tends to fluctuate month by month, or day to day, this may not be the best option for you.

In the world of small business financing, the more options, the better.