Alternative Lending: Best Lenders and Loan Options

Despite the prevalence of main street businesses across the U.S., small business owners have traditionally faced difficulties when it comes to accessing financing. Luckily, the alternative lending industry has developed as a solution to this problem.

Whereas small businesses are often turned away by banks and credit unions, alternative lenders offer business loans that are accessible, flexible, and quick to fund.

Wondering if an alternative lending solution is right for your business? We’re here to help.

In this guide, we’ll break down some of the top alternative lenders, the most common types of alternative loans, as well as the possible advantages and disadvantages of alternative vs. traditional bank lending—so you have all the information you need to make the best decision for your business.

The Ultimate Guide to Alternative Lending

• What Is Alternative Lending?
• Best Alternative Lenders
• Types of Alternative Lending
• Advantages and Disadvantages of Alternative Lending
• Bottom Line

In short, alternative lending refers to business loans that are available outside of traditional bank lending.

What is an alternative lender?

Instead of banks or credit unions, alternative lenders are typically online-based, private companies that operate like the lending arm of a bank.

This being said, alternative lenders offer a range of business financing products, including term loans, business lines of credit, invoice financing, equipment financing, and more.

In addition, whereas bank loans are traditionally difficult to qualify for—with strict requirements, extensive application processes, and lengthy-time to funding—alternative lending is characterized by speed, flexibility, and accessibility.

To this point, although alternative lending products typically have higher interest rates than bank- or SBA loans, they have more flexible requirements (credit score, time in business, annual revenue), thereby offering funding to a wider variety of small businesses.

Plus, most alternative business lenders use algorithms to underwrite loan applications quickly, software to scan business financials and sync with accounting files—and allow the entire application process to be completed online.

Therefore, because alternative lenders don’t have the costs associated with running a brick-and-mortar operation (like a bank does) they can focus on offering streamlined processes, as well as investing in small businesses that are normally considered “too risky” for bank loans.

As the popularity of alternative lending has grown, more and more companies have entered the space, leading to a variety of options for small business owners. This being said, however, in comparison to banks, which face strict government regulations, there are generally fewer restrictions on alternative business lenders.

Therefore, you’ll want to be careful and ensure that any lender you consider working with is reputable, reliable, and can offer the best possible financing for your business.

With this in mind, if you’re looking for a place to start, you might look into the following options, summarized in the chart below:

Top 4 Alternative Business Lenders

Let’s break down these alternative lending options in more detail.

Funding Circle is an alternative business lender that operates on a peer-to-peer model—meaning the funding for their loans is actually provided by a network of individual and institutional investors.

This being said, Funding Circle can offer loans of up to $500,000 with terms that range from six months to five years. Interest rates on Funding Circle loans range from 4.99% to 22.99%.

Of all of the alternative lending options out there, Funding Circle will be one of the best choices for affordable rates and long terms—similar to a traditional bank loan. Unlike a traditional bank loan, however, Funding Circle will be able to process your business loan application much faster, in as little as one day and an average of five days.

To qualify for a Funding Circle loan, you’ll need at least two years in business and a minimum credit score of 620. Unlike some other alternative lenders, Funding Circle does not have a minimum annual revenue requirement.

One of the original players in the alternative lending industry, OnDeck is a worthwhile option for short-term loans, as well as lines of credit.

With OnDeck, you can access a short-term business loan up to $250,000 with terms up to 24 months and interest rates ranging from 27.2% to 99.9% (based on loans originated in the half-year ending March 31, 2024; minimums provided are rates that at least 5% of customers received). Their line of credit, on the other hand, is available up to $100,000 with a 12-month term and APR ranging from 35.9% to 84.9% (based on loans originated in the half-year ending March 31, 2024; minimums provided are rates that at least 5% of customers received).

For both of these financial products, OnDeck requires a minimum credit score of 625, minimum annual revenue of $100,000, and at least one year in business to qualify.

This being said, like the other alternative business lenders we’ve discussed, OnDeck offers a quick and simple application and can fund businesses as quick as one day.

Additionally, OnDeck offers a prepayment discount—25% off your outstanding interest discount—when you pay early. It’s important to note, however, that OnDeck can be expensive, especially if your interest rates fall on the higher end of the spectrum.

Finally, the last option on our list of the best alternative lenders, Fundbox, is particularly noteworthy for startups and businesses with average credit.

Fundbox offers invoice financing, as well as a line of credit, both of which have extremely flexible requirements. To qualify for either of these alternative lending options, you only need a minimum annual revenue of $25,000, a minimum credit score of 500, and at least three months in business.

This being said, for either of these products, you can access amounts of capital up to $100,000 with terms of 12 or 24 weeks and interest rates starting at 4.66%.

Fundbox has one of the simplest application processes out there, allowing you to connect your business accounts to the Fundbox platform to evaluate your eligibility. Therefore, Fundbox can offer funding as fast as one day.

As you can see, there are a variety of alternative business lenders out there—and with flexible requirements and streamlined applications—each of these lenders makes financing much more accessible to small businesses.

This being said, within these business lenders’ offerings, there are different product types—short-term loans, lines of credit, invoice financing, etc.

Keeping in mind everything we discussed above, let’s explore some of the most common types of alternative lending in more detail:

A business term loan is what most people think of when they think of commercial financing. These loans have a set repayment time, a set number of payments, and a fixed or variable interest rate.

The difference between these term loans and traditional bank loans, however—other than the fact that they’re issued by alternative lenders—is that they often have shorter terms and higher interest rates. On the other hand, of course, online term loans are much easier to qualify for.

This being said, short-term loans are most common in alternative lending—meaning term loans with a repayment period of one year or less. Some lenders, however, like Funding Circle, do offer longer options.

Business lines of credit, like those offered by Fundbox, are typically revolving lines of credit—meaning you can draw funds when you need them, pay them back with interest, and then your loan amount resets back to its original value.

Although banks do offer lines of credit, these products usually have lengthy terms and like bank loans, are difficult to qualify for.

Conversely, lines of credit from alternative lenders have shorter terms and are fairly easy to qualify for. As we mentioned above, these options are often great for newer businesses or businesses with bad credit.

Equipment loans, also called equipment financing is an alternative lending option that we did not discuss with our lenders above.

In essence, equipment financing is a type of business loan used specifically for the purpose of purchasing business equipment. Typically, lenders allow you to finance up to 100% of the value of the equipment—and the equipment itself serves as collateral on the loan.

This being said, similar to invoice financing, equipment financing is often fairly easy to qualify for—as lenders will evaluate the value of the equipment to determine your eligibility, much more than traditional requirements like your credit score.

Like many of the alternative lending options we’ve reviewed, equipment financing is available from some banks and credit unions, but online lenders will be able to offer faster processes and more flexible requirements (but usually higher interest rates as well).

Learn about some of the best equipment financing companies here.

Unlike some of the other alternative lending products we’ve discussed, invoice financing is not typically offered by traditional bank lenders.

With invoice financing, a lender will advance you capital that’s secured by your unpaid invoices. Lenders will usually offer up to 85% of the value of the invoices, with the remaining 15% (minus fees) paid to you when your customers pay their invoices.

Like equipment financing, invoice financing is fairly easy to qualify for as the invoices themselves serve as collateral on the loan.

Overall, invoice financing is a popular loan option for B2B and service-based businesses who have cash flow impeded by unpaid invoices.

This being said, it’s important to note that there are alternative lenders who offer invoice financing, as well as those who offer invoice factoring. Although these two terms are often used interchangeably, there are differences between them, so you’ll want to ensure that you understand what specifically a lender is offering before opting for this product.

Finally, a merchant cash advance is another alternative lending option that is very common in the industry.

With this type of product, a financing company gives you an advance that’s paid back with a percentage of your daily credit card transactions, plus a lender fee. Merchant cash advances are best suited for companies that do a large amount of their business through credit card transactions.

On one hand, this is a useful way to pay back an advance: If you have a slow day, you’ll pay less. But on the other, merchant cash advances are incredibly expensive—and we generally advise that you explore other options before settling on one.

So, when it comes down to it, alternative lending has become a huge part of the business financing space—with multiple offering a variety of products to meet the needs of small businesses.

This being said, however, there are still traditional lending sources—big banks, community banks, credit unions, etc.—that also provide options for business funding.

How do you know which route is right for your business?

Let’s explore some of the pros and cons of alternative lending to help you decide.

Although we’ve reviewed some of the most notable advantages of alternative lending throughout our discussion of different lenders and loan options, let’s list them out clearly here:

As you can see, there are many strong advantages to alternative lending. When you compare it to traditional bank lending, however, there are some drawbacks.

To this point, although not every small business will be able to qualify for bank financing, it’s still important to understand what these disadvantages entail.

At the end of the day, there’s a reason that alternative lending has become so popular for small businesses.

Alternative lending is more accessible, flexible, and easy to apply for—and generally, these lenders offer a wider variety of options compared to most traditional lenders.

This being said, however, if you can qualify for a bank loan, this will almost always be the most affordable type of financing.

Therefore, as you look to finance your business, you’ll want to compare and contrast multiple options—whether bank or alternative lending options—to determine what solution can offer the most ideal rates and terms for your needs.