Alternative business lending

Alternative business financing is designed to meet the different financial requirements of all types of business. Funds may be used for general purpose needs or to finance a specific project or purchase:

1. Business line of credit

A business line of credit functions like a high-value credit card but comes with lower interest rates and fees. Organizations can withdraw as much as they want when they want from a loan facility up to the limit of their borrowing. Interest rates are usually fixed, and businesses may repay on a set or flexible schedule. This kind of loan is ideal for organizations that want maximum flexibility or for investment situations where the total cash required is unknown. 

• Pros: Only pay interest on the cash you use
• Cons: Higher levels of reporting usually required to maintain access to the loan facility

2. Term loans

The most common type of business loan. Term loans are typically used for one-off investments where you know exactly how much cash you need. Commercial real estate purchases, plant and equipment investment, and debt repayment and restructuring activities work well with this kind of loan. You receive a single, lump-sum cash injection and then pay it back in regular instalments, plus interest and any fees, over a fixed period of up to 25 years. 

• Pros: Fixed interest rates and predictable repayment instalments
• Cons: Few options to ask for extra funding or change the terms of the loan after closing
  

3. Merchant cash advance

Available for businesses that accept customer payments by credit and debit card. A merchant cash advance allows you to borrow against the value of your card sales. As your card sales increase, your borrowing limit goes up. Pay the loan back with a fixed percentage of your card sales on a daily, weekly or monthly basis. Your sales act as security for the loan, no added collateral is required.

• Pros: No added collateral required. The loan facility grows as your card sales go up
• Cons: Not suitable for businesses that don’t take card payments. Loan facility can also go down if your card sales fall

4. SBA loans

Standard SBA 7a business loans are provided by banks, credit unions and online lenders who are part of the Small Business Administration (SBA) lender network. Partially backed by the US Government, these loans can provide up to $5million to qualifying borrowers with repayment terms as long as 25 years. 

SBA loans usually come with much lower interest rates and fees than other commercial lending but meeting their strict rules of eligibility can be tough for many businesses. As well as an approval process that can take several months, organizations will typically need to have been in business for at least four years and have annual revenues over $180,000. Your personal credit score must be at least 680.

• Pros: Lower interest rates and fees
• Cons: Strict rules on eligibility

SBA Microloans and community advantage loans

Nonprofit and community-based lenders can provide SBA Microloans and community advantage loans for businesses that struggle to secure standard business loans of $100k or less. These types of SBA loans are ideal for underserved communities, including women, veterans, minorities, immigrants and refugees. 

SBA Microloans are available up to $50,000 and can usually be secured with FICO scores as low as 500, or even with no credit score at all. However, they often require collateral or a personal guarantee that makes you personally responsible for the debt, not your business. Community Advantage loans function much like regular SBA 7a business loans but come with a maximum of $350,000 and other features that may make them easier to secure.

5. Equipment financing

Buying big ticket machinery and equipment can put a major dent in your cash flow, but equipment loans can pay for your new plant and machinery without causing financial stress. Equipment loans are ‘self-collateralizing’ – they use the asset you’re financing as security, similar to a car loan or a residential mortgage. Once the loan is approved, the lender sends the funds to the equipment vendor, who then delivers the machinery. You use the equipment as you pay for it and the lender maintains a lien on the title to the machinery. Once you pay the loan back, the lender releases the lien, and you own the equipment outright.

• Pros: No need to provide your own collateral
• Cons: Can only be used for equipment purchasing, does not provide any cash 

6. Invoice financing

Also known as account receivables financing, this type of loan allows you to borrow against the value of your unpaid invoices and is best for B2B organizations. The lender will usually provide up to 95% of the invoice value within a few days or even hours of the bill being raised. You may still be responsible for collecting the cash from your clients, or the lender (also known as the ‘factor’) may collect on your behalf. If you collect, you must repay the lender on their schedule. If they collect, they will take back their advance from the client’s payment and then pass any residual sum (after charging interest and fees) back to you. 

• Pros: Get paid in days instead of waiting weeks or months
• Cons: High fees and interest rates. You may lose control of your sales ledger