Business Loans

Alternative Lending: Where to Find the Best Nonbank Business Loans

Alternative lending can help small business owners secure funding when they can’t get a loan or line of credit through a traditional lender, like a bank or credit union. Nonbank or online lenders typically have more flexible eligibility requirements, simpler applications and faster approval and funding times. Despite the benefits, there are some downfalls, including higher costs and unfavorable repayment terms. It’s important to consider your best options when choosing an alternative lender.

What is alternative lending?

Alternative lending refers to loans, lines of credit and other types of financing offered by companies outside the traditional banking world. Many alternative lenders operate through online platforms, which is why this type of lending is also often referred to as online lending or fintech lending. Alternative lenders might raise their own capital and lend to small businesses directly or connect borrowers with investors. Online lenders may even be retailers, like Amazon or Square, offering loans to their merchants. They might offer:

Small business loans

Term loans are lump sums of money repaid over a specific period referred to as the payment term. The payment amount is typically the same each month and includes a portion of the principal balance as well as interest. Such small business loans may either be short term (three to 18 months), used to cover gaps in cash flow or unexpected expenses, or long term (three to 10 years), for significant investments like remodeling or equipment purchases.

Lines of credit

Like a credit card, a line of credit is revolving credit where the borrower can draw against the account up to a certain amount. Borrowers are only responsible for repaying what they borrow, plus interest. Each time a payment is made, the credit line is replenished until the withdrawal period ends.

Merchant cash advances

A merchant cash advance (MCA) is when a small business receives money upfront in exchange for a percentage of the business’s future income, typically in the form of credit card transactions.

Invoice factoring

A business may sell its unpaid invoices to a factoring company in exchange for money upfront, typically up to 75% to 90% of the total value of the invoices. Invoice factoring is often confused with invoice financing, which involves taking out a loan against the invoices.

Nonbank lenders vs. banks

Traditional lenders such as banks, credit unions and other thrift institutions also offer small business loans, lines of credit and invoice financing, but you most likely won’t find options like MCAs at traditional banks. Unlike most alternative lenders, traditional lenders also offer Small Business Administration (SBA) loans and frequently offer additional banking services like checking and savings accounts. Further, though many traditional financial institutions have an online presence and may even offer online applications for current customers, they typically maintain brick-and-mortar locations where customers — consumer or commercial — can visit.

Most small business owners still seek out traditional lenders when they need financing, but nonbank lenders are disrupting the small business lending industry.

4 of the best alternative lending companies

The best alternative finance company for your business depends on a variety of factors, including your personal credit score, the amount of money you need and how quickly you need funds. To help you get started, here are four of the best alternative finance companies.

In addition to being non-bank lenders, the options we chose had to meet the following criteria:

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

Best for lower credit scores

National Funding

National Funding offers equipment financing and business loans, which can be used for a variety of expenses including inventory, marketing costs, payroll, taxes and more. It offers a fast application process, and approved loans can be funded in as few as 24 hours.

While the company does not publicly disclose its rates or fees, borrowers who pay off their loan balance within the first 100 days of opening the account may be eligible for a 7% discount on the remaining balance. Equipment financing customers may be eligible for a 6% discount for early payoffs. Plus, there’s no down payment required.

Product Loan amount Repayment terms Time to funding after approval Min. requirements
Working capital loans $5,000 to $500,000 4 to 24 months, with daily or weekly repayments 24 hours 500 FICO, one year in business, $100,000 in annual revenue
Equipment financing Up to $150,000 24 to 60 months 24 hours 575 FICO, six months in business

Best line of credit

Kabbage

Kabbage only offers lines of credit for small businesses, so borrowers may withdraw only as much as they need, starting at $500, up to their approved limit. The monthly fee ranges from 1.25% to 10.00%. If there is no monthly balance, the borrower does not need to pay the fee. Unlike many other lenders, Kabbage does not have a minimum credit score requirement.

Product Loan amount Repayment terms Time to funding after approval Min. requirements
Line of credit $1,000 to $250,000 6, 12 or 18 months One to three days One year in business, $50,000 in annual revenue or $4,200 monthly revenue

Best equipment financing

Currency

Currency offers working capital loans and commercial loans to businesses with strong credit and reliable revenue. Commercial loans can be used to finance equipment purchases up to $500,000, with rates as low as 6.49%. In addition to interest, borrowers are also expected to pay a $295 documentation fee.

Product Loan amount Repayment terms Time to funding after approval Min. requirements
Commercial loans Up to $500,000 Up to 72 months Two business days 600 FICO, one year in business, $100,000 in gross annual sales

Best for larger loan amounts

Rapid Finance

Rapid Finance offers business owners a variety of lending solutions including small business loans, merchant cash advances, lines of credit, invoice factoring and SBA loans.

With a Rapid Finance small business term loan, borrowers can access up to $1,000,000 in capital, making it a good option for borrowers who have significant expenses that can’t be met by some of the other lenders above.

The company also offers merchant cash advances up to $500,000. Repayment is dependent on the borrower’s daily credit card sales, and therefore, amounts vary from borrower to borrower. Though Rapid Finance does not specify the amount of time a borrower must be in business, it may be difficult for businesses open for less time than one year to provide the credit card transaction history required.

Product Loan amount Repayment terms Time to funding after approval Min. requirements
Term loans $5,000 to $1,000,000 3 to 60 months, with daily, weekly or monthly payments As soon as one day 550 FICO, $50,000 minimum annual revenue
Merchant cash advance $5,000 to $500,000 Varies based on daily sales As soon as one day 550 FICO, $50,000 minimum annual revenue

Alternative lending: Pros and cons

However, alternative loans aren’t right for everyone. To determine if nonbank lenders are the right choice for your business, it’s important to carefully weigh the benefits and disadvantages.

  Higher approval rates

If your credit is weak or you have a relatively new business, consider that alternative lenders typically offer lower minimum credit scores and revenue requirements and more relaxed time-in-business requirements when compared to traditional lenders.

  Quick and easy application process

Many of today’s nonbank lenders offer borrowers an easy application process that takes place predominantly online. The process can often be completed in minutes, and funding decisions are often available within 24 hours, with some available in minutes. This can be a real benefit for borrowers who need funds fast.

  Fast funding

Along with the fast application process, alternative loans also boast quicker funding times when compared to traditional lenders. Some lenders, like National Funding, even offer funding within as few as 24 hours after approval.

  Higher interest rates

Though individual rates vary across the lending industry, nontraditional loans and other types of financing typically carry higher interest rates when compared to traditional loans. For instance, in 2019, annual interest rates (AIRs) for loans originated by online or alternative lenders ranged from 4.99% to 32.6%, but that does not include origination costs or other fees. This is significantly higher than for traditional bank loans.

  Lack of transparency

Business customers aren’t always aware of what the rates, repayment terms and fees are as they relate to alternative lending, according to the Federal Reserve. This can make it difficult for borrowers to truly understand the cost of a lending product.

  Less flexible terms

Repayment terms vary from lender to lender, but some alternative loans come with unfavorable repayment terms. For instance, borrowers may be expected to make daily or weekly repayments as opposed to more traditional monthly payments.

 

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