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Small Business Owners: The Pros & Cons of Alternative Lending Options

Your small business will eventually need financing. Whether it is additional equipment or an emergency repair, long- or short-term financial assistance is inevitable. When that time comes, where will you go for help?

The obvious answer would be your local bank or lending institution. Or is it? Since 2008 bank loans have been much harder to qualify for. When the bank won’t help, where can you go for financial assistance? 

Types of Alternative Financing

Term Loans

Term loans are loans for one specific amount with four- to five-year set terms and annual percentage rates (probably higher than your local bank). These are the safest and lowest cost alternative loans.

Line of Credit Loans

Line-of-credit loans are cash advances from which you draw smaller amounts, as needed. They are available from both banks and alternative lenders, but banks require a higher personal credit score and a longer time in business. Alternative lenders may require as little as six months in business and $25,000.00 in annual revenues to apply for a line of credit.

Invoice Financing and Invoice Factoring

Some people consider these similar products, but they work very differently. 

With Invoice Financing, you add a number of outstanding customer invoices together and apply for an invoice financing loan using your invoices as collateral. If approved, you receive the money requested and begin payments away. You hope to collect on your old accounts in order to make the payments; however, your payments are due whether your clients repay you or not. You accept the risk of collection, but you also maintain communication between you and your customer.

With Invoice Factoring, you sell the invoices to the lender at a reduced amount (usually 1-3%). You receive a set amount of the loan up front (i.e., 85%) and receive the remainder once the lender has collected all of your collateral invoices. The lender is responsible for collection efforts at a significant cost. The major drawback is a third party is making collection calls to your customers. If their methods are unprofessional, you could lose customers as a result of their tactics.

Merchant Cash Advances

The last method of alternative financing is the Merchant Cash Advance, also known as MCA’s. These loans are based on your anticipated debit or credit card receipts and are characterized by shorter payment terms; usually under 2 months. They are generally easy to qualify for since it does not focus too much on your credit score and approvals can be as fast as 24 hours.

Merchant Cash Advances are a good option when you need money fast and have been turned down by the banks. These loans are typically paid daily or weekly as opposed to larger monthly payments and longer payment terms associated with traditional bank loans

Pros and Cons of Alternative Financing 

On the plus size:

• Alternative loans are often funded within 24 hours. 
• Convenient online applications may be completed wherever you have Internet access and a cell phone. 
• Many of the items alternative lenders consider are available online, so you are not burdened finding paperwork to attach to your application. 
• Finally, qualification has intentionally been made easier than traditional loans. 

On the minus side:

• The factors online lenders consider are different than those of local banks. So merchants may not be familiar with the terms. 
• Alternative loans may include higher APRs and terms due to the fact that they are considered high risk loans to the lenders. 

When Alternative Financing Makes Sense

When Banks Turn You Down

The industry was created to help small businesses when the banks turn them down. Make sure you can handle the payments and ask yourself… Do the payments fit into my budget?

When You Need Money Now!

Unforeseen emergencies lend themselves to alternative financing because most lenders offer a quick turnaround on approval and payouts. Payment is often made within days or even hours, and repayment terms are often easier than traditional loans.

Long-Term Growth 

Another area alternative lenders have targeted is longer-term loans to open a new location or add additional equipment or workers. Long-term loans are often hard to get from your local bank when you are a startup experiencing growing pains. This is a good time to consider alternative financing sources.


If your company is in need of financing, there are alternatives to your local bank. Research companies who offer what you are looking for, take advantage of the free estimates, and review the offers you get to make sure they fit your budget. Make sure the bottom line is something you can live with, and use this repayment to build your credit for the future.