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Alternative lending, sometimes called online or fintech lending, refers to any loan that’s available through a nonbank lender. These lenders don’t take deposits and typically operate completely online, using technology-first underwriting practices to expedite and expand credit access.
As a result, alternative lenders usually have more flexible qualification requirements, streamlined applications and faster funding times than traditional business lenders. However, alternative lenders also tend to charge higher interest rates and offer shorter repayment terms.
Here’s a breakdown of how alternative lending works, plus information to help you decide if it’s right for your small business.
How Much Do You Need?
How does alternative lending work?
Alternative lending started with peer-to-peer consumer loans and grew largely out of the Great Recession. During that time, nonbank lenders rose to fill the funding gap left by traditional financial institutions like banks and credit unions.
Now, alternative lending is a popular solution for both consumer and small-business loans. These nonbank lenders might raise their own funds and lend to small businesses directly, connect borrowers with investors, or partner with banks to originate loans.
Common types of alternative lending products include:
Lines of credit.
Merchant cash advances.
In general, alternative lenders operate online, using technology to underwrite, price and issue different types of business loans. While traditional lenders tend to rely on a manual review system to evaluate loan applications, alternative business lenders often use digital data sources — such as bank accounts, merchant accounts or accounting software — to analyze your finances and determine your creditworthiness.
Differences between traditional and alternative lending
Alternative lenders typically offer streamlined applications and fast funding times. However, for that speed and convenience, alternative lenders often charge higher interest rates. If you can qualify, traditional lenders will usually offer the lowest interest rates and most competitive repayment terms.
Here’s an overview of the differences between traditional and alternative lending.
Includes banks and credit unions.
Includes online and fintech lenders.
Strict eligibility requirements. May require multiple years in business and excellent credit.
Flexible eligibility requirements. May work with startups or businesses with bad credit.
Larger loan amounts.
Smaller loan amounts.
Lower interest rates and longer repayment terms.
Higher interest rates and shorter repayment terms.
May need to apply for a loan in person; applications can require extensive documentation.
Usually can apply for a loan online or over the phone; applications often require minimal documentation.
Generally slow to fund; may take several weeks.
Generally fast to fund; may receive approval and access to capital in as little as 24 hours.
Customer support can be available in person, over the phone or online.
In-person customer support isn’t typically available.
Top alternative lenders for small businesses
According to survey data from a 2022 Federal Reserve report, small-business owners apply to alternative lenders at almost the same rate as large banks — and more often than small banks. If you’re considering an alternative business loan, you might start with the following companies:
Best for: Established businesses.
Funding Circle offers business loans with competitive interest rates and repayment terms. You can get loans up to $500,000 with terms up to seven years.
However, unlike with some alternative lenders, you’ll need to meet strong eligibility requirements to qualify, making this a good option for well-established small businesses.
You’ll need a minimum credit score of 660 and at least 24 months in business.
Best for: Fast funding.
With Bluevine, you can apply for a business line of credit and receive approval in just minutes. Once you’re approved, you may be able to access your funds in as little as 24 hours.
Bluevine offers lines of credit in amounts up to $250,000 with repayment terms up to 12 months. These lines of credit can also be a good option for startups or businesses with bad credit, as they may be able to qualify with a minimum credit score of 625 and at least six months in business.
Best for: Loan options.
With OnDeck, you can apply for a short-term loan or a line of credit, depending on the type of business funding you need.
OnDeck’s term loan is available in amounts up to $250,000 with repayment terms up to 24 months. The lender’s line of credit, on the other hand, is available in amounts up to $100,000 with repayment terms of 12, 18 or 24 months.
And regardless of the option you choose, OnDeck can fund loans as quickly as 24 hours.
Best for: Startups.
You may be able to qualify for a business line of credit from Fundbox with only six months in business. Lines of credit are available for up to $150,000 with repayment terms of 12 or 24 weeks.
Fundbox can also be a good option for businesses with bad credit, as they may be able to qualify with a minimum credit score of 600.
Best for: Borrowers with bad credit.
If you have a minimum credit score of 500, you may be able to qualify for an alternative term loan from Fora Financial.
Fora Financial offers working capital loans that range from $5,000 to $750,000 and terms up to 15 months. Once you’ve applied for a loan, Fora may be able to give you a decision within 24 hours and provide funding within 72 hours from approval.
Alternative lending best practices
In general, alternative business lenders are not subject to the same laws and regulations as bank lenders. Instead, alternative business lenders are regulated by a mix of federal and state guidelines — in addition to self-regulation.
Here are some steps you can take to maximize caution when working with alternative lenders:
Plan ahead for funding. It’s not possible in every situation, but planning ahead for funding can help you avoid getting taken advantage of by a predatory lender. When you feel desperate for funding, you may be more likely to ignore red flags or take the first offer you’re approved for rather than find the best, most affordable option.
Be wary of opaque lending policies. Reputable lenders should be upfront about their process and pertinent loan information, especially the annual percentage rate and terms. If you’re having trouble getting straight answers or if the business loan agreement is unclear, it’s probably best to seek another lender.
Use government websites. When possible, look for lenders through trusted resources, like government websites. For example, New York state has a lender directory to help you find alternative lenders.
Do your research. As a part of your preparation, do as much lender research as possible. Ask your network for recommendations, visit each lender’s website and read available reviews. You might also consider using a third-party resource, like a business loan broker, to help vet your options.
Is alternative lending right for my business?
Alternative lending can be a good option for small businesses that can’t qualify for traditional bank loans, including startups and businesses with bad credit. This type of financing can also be helpful for borrowers who need a business loan quickly — and don’t mind paying higher rates for immediate access to capital.
If you can qualify for a bank or SBA loan, however, those options will likely be the most affordable funding for your business. Traditional lenders can be a better choice if you’re looking for larger loan amounts, longer repayment terms and low interest rates.
And if you have a relationship with a bank or credit union, you may be able to benefit from your established history. In particular, small community institutions tend to have higher approval rates and greater borrower satisfaction.