Alternative small business loan lending helps business owners secure the funds they need to grow and stay competitive without the hassles from banks.

We entered 2023 with the same economic conditions that plagued 2022. Supply chain issues, inflation, and uncertainty are still complicating how we do business in our industries, and there’s not a light at the end of the tunnel just yet.

Seeing the overarching economic trends and the Federal Reserve’s prime rate hikes, banks and credit unions have tightened their lending across the board and become extremely selective toward the businesses they finance. Entrepreneurs who would have received swift approvals a year ago are faced with denied applications, leaving them without many options as they grow and develop their businesses.

Fortunately, bank loans aren’t your only option. With alternative business lending, you can secure the funds you need to accomplish your goals and stay competitive.

Continue reading for our comprehensive guide to alternative business lending options in 2023.

Alternative Non-Bank Small Business Loan Lending Options
Alternative Non-Bank Small Business Loan Lending Options

What Is Alternative Lending?

Alternative lending, otherwise known as alternative financing, describes the capital sources outside of traditional banks and credit unions. Lenders in this space offer the same solutions as conventional lenders, with even more options to choose from, including revenue-based financing options and other specialized solutions.

Compared to banks, alternative lenders offer streamlined underwriting processes, faster funding times, and looser eligibility requirements. However, all these benefits come with one major drawback—higher interest rates.

The less-restrictive qualifications create a risky scenario for the lender, so they’ll enforce higher interest rates as a method of protecting themselves against late payments or defaults. For example, the average alternative lending interest rate varies from 4% all the way to 30%.

Why Would Someone Not Work With Their Bank?

Banks are staples in the business financing world. Before the internet, they were one of the only options for entrepreneurs seeking to access capital. Now, it’s much easier to find alternative funding sources outside of banks, but that doesn’t mean financing through your bank is a bad idea.

There’s nothing wrong with growing your business through bank financing; It’s just a little more difficult if you have a low credit score, time in business, or annual gross revenue.

Bank qualifications are notoriously strict. For example, you’ll need a 660+ credit score$250,000+ in annual revenue, and around two years in business to reach an approval with Bank of America without offering an asset as collateral.

The strict eligibility requirements often don’t fit growing businesses that re-invest their profits to drive success in other areas of their operation. A common example is a business that completes a contract and immediately uses that money to start a new marketing campaign. Banks need to see cash reserves and liquidity to approve a business for financing, which often limits the funding amounts and terms offered to rapidly growing businesses.

Bank financing is also difficult for those who operate in niche markets, high-risk sectors, and new industries. This is because traditional lenders often stick to what they know, meaning they don’t like to take risks by financing businesses they don’t fully understand. Industries like cannabis, food service, and newer technology commonly fall outside this group, making it more difficult for entrepreneurs within these sectors to reach approvals that fit their business models.

But, in 2023, working with a bank has become even more difficult. Traditional lenders aren’t financing like they used to because of the economic conditions overhead, and even entrepreneurs who meet their rigorous criteria are facing denied applications. That’s not to say it’s impossible, of course, but few businesses are able to go down this route in the current economy.

Bank Lending vs. Non-Bank Lending in 2023

The Federal Reserve increased the prime rate seven times throughout 2023 to combat inflationary pressures, landing at 7.50% at the time of publication. And, as stated above, banks are slowing their lending considerably until the economic conditions improve. The higher cost of capital and more restrictive lending combine to form a roadblock for entrepreneurs with growing businesses. Without a capital source, it’s difficult to take advantage of opportunities and solve challenges, especially if you’re experiencing cash flow constraints.

Alternative lending has always picked up the slack of bank lending, but in 2023, it’s become a much more powerful resource. For one, the elevated prime rate is closer than ever to alternative lending interest rates, making the cost of capital nearly identical between banks and alternative business lenders.

Entrepreneurs can take advantage of all the benefits of alternative financing without the FOMO of thinking they could have received a lower interest rate with the bank. Additionally, if you secure capital now at a higher interest rate, you always have the option of refinancing your debt in the future when interest rates drop.

Most Popular Alternative Business Lending Options

Entrepreneurs can leverage a variety of alternative business lending options to grow their businesses. Here’s a breakdown of some of the most popular:

Term Loans

Term loans are what most people think of when they hear “business loans.” Funds are provided in a one-time, lump sum payment that you’ll repay over the term outlined by your lender. Each payment will work towards the principal of the loan and the interest. Once you pay in full, you’ll have no debt attached to your business.

Business Lines of Credit

Lines of credit are popular among entrepreneurs in all industries. Once you establish a business line of credit with a lender, you can draw funds on an as-needed basis, only paying interest on the amount borrowed rather than the total credit line. You can establish a line of credit with a bank or alternative lender, but just be aware: banks have been known to unexpectedly pull lines of credit during uneasy economies.

Equipment Financing

Equipment financing is a way for you to break down a sizeable equipment purchase into a more manageable schedule. Alternative lenders tend to carry higher equipment financing interest rates compared to banks, but banks are very selective about the types of equipment they finance. It’s a give-and-take, so make sure to carefully consider each option before you sign on the dotted line.

Revenue-Based Financing

This method of accessing capital is based on your business’s profitability. Lenders review your financial statements and projections, then determine your terms and funding amount based on that information. Banks are less likely to offer this service than alternative lenders, but there are a few things you should watch out for as you consider revenue-based financing options.

As you may have guessed, merchant cash advances are a type of revenue-based financing, so you’ll have to guard against the scams and red flags that populate this space. Locking yourself into an agreement that is predatory or doesn’t fit your business model could have drastic consequences for your bottom line. For the best results? Research the organization you’re working with intensively to ensure they’re reputable, transparent, and have your best interests in mind.

Types of Alternative Lenders

Alternative lenders have different specialties. Some are more helpful for startups, whereas others are better fit for established businesses with lengthy times in business and strong credit scores. There are micro lenders that offer less substantial funding, region lenders that work within certain areas, and specialty lenders that finance only specific industries.

Alternative lenders are also found within FinTech marketplaces, which are a relatively new approach to business financing designed to save the entrepreneur time. These organizations combine multiple lenders into one centralized platform, where business owners apply once and receive multiple offers. Some marketplaces, like National, streamline the process further by combining technology with an expert team of human advisors, but every marketplace has its own unique way of assisting its clients.

There’s one last type of alternative lender that you should be aware of—angel investors. These individuals, or groups of investors, provide funds to entrepreneurs in exchange for a percentage of ownership in their business, with the funding amounts set by the valuation of the business. For example, a capital investor could offer you $300,000 in exchange for 30% ownership of your $1,000,000 business.

How to Apply With Alternative Lenders

Most people find alternative lenders through internet searches and research. Others find them through word of mouth, but the bottom line is that you won’t be able to take the same approach as you would when visiting the physical location of your bank.

If you’re not using a marketplace, searching for an alternative lender is as easy as typing “alternative business loans” into your search bar. The hard part, however, is choosing the right one for your specific situation. You’ll have to research each option carefully, taking careful note of their eligibility requirements and offered programs, and do a “reputation check” of each. This includes visiting review sites like Trustpilot and learning more about their service through the experience of other entrepreneurs.

Once you have a few top choices, you can start filling out applications with each lender. Every organization has a different application process, but most alternative lenders provide a streamlined application process that requires much less time than a bank application. This takes some of the frustration from the process. However, the next steps are a bit more challenging.

You’ll have to wait and hear back about each application you’ve submitted. Once you receive approvals or declines, you can start to narrow your search and find the terms and offered amount that best suits your business. It’s not easy to forecast for the future, so it might be beneficial to work with a trusted financial advisor during this process to help ensure you’re making the right decision for your business.

What’s the Better Option?

The simple answer is: It depends. Every business is different, with each having its own unique characteristics that will make one option more attractive than another. There’s really no blanket answer that applies to all businesses, but here are a few differentiating factors that play into every entrepreneur’s decision.

Funding Times

The application to funding speed of a lender is one of the most important things to consider. Banks and credit unions tend to have longer funding times on average (60 to 90 days). Alternative lenders, on the other hand, offer same-day approvals in many cases, with funding times following soon after that. This makes alternative business lending a better option for those who need capital fast, but if you don’t need immediate cash, working with a bank may be more viable.

Interest Rates

As discussed previously, banks and credit unions offer lower interest rates compared to alternative lending organizations. However, the prime rate surge we experienced in 2022 has leveled the playing field in some regards. Interest rates between the two types of lenders are relatively the same in 2023, but there’s no way to tell what your specific interest rate will be until you’ve applied and received approvals.

Interest rates are determined by your business’s financial background, your time in business, and the lender you’re doing business with. The only way to ensure you’re getting the best possible rate is to shop around and compare offers against one another.

Offered Programs

There are more alternative business lending options available compared to bank loans and financing. Banks tend to stick with traditional financing solutions, like lines of credit, term loans, and equipment financing. Alternative lenders, on the other hand, can offer revenue-based financing solutions, purchase order financing, and more specific types of programs, like Canna Business financing.

If you’re only interested in the core financing programs, you might benefit more from working with a bank or credit union. However, if you’re looking for more specific types of financing solutions, it’s a good idea to explore alternative lenders and research their programs.

Get A Free Consultation