As a small business owner, you know how critical funding is to your company’s survival and growth.
But securing a loan from a traditional bank? That’s easier said than done.
Thankfully, there’s a faster, flexible and more accessible lifeline out there for small business owners—and it comes in the way of alternative financing.
In this guide, we’ll break down what alternative financing is, weigh its pros and cons, explore some business funding options, and offer tips on finding the best fit for your small business.
Let’s get started!
Understanding Alternative Financing
Alternative financing is exactly as it sounds—it’s an alternative to traditional bank loans.
Conventional financing, like getting a loan from a traditional bank, often comes with rigid eligibility requirements and lengthy approval processes, making it tough for small business owners with imperfect credit to quickly secure the funds they need.
That’s where alternative financing comes into play.
Offered by a range of funding organizations, from online lenders to fintech institutions, this flexible and faster approach is tailored to the specific needs of small business owners, providing much-needed cash without the usual hurdles associated with big banks.
No more waiting weeks for approval or filling out piles of paperwork. Alternative financing provides many accessible options to meet your business where it’s at, even if you’re struggling with cash flow or a limited credit history or low business credit score.
Pros and Cons of Alternative Financing
Like with any financial decision, there are both potential advantages and downsides to consider.
Below, we walk you through both sides to give you a clear picture of what alternative financing could mean for your business.
Pros of Alternative Financing
Here are some of the top benefits of alternative financing that could make it a great fit for your business:
- Flexibility—Whether you need capital for equipment, marketing, hiring staff, or expansion, there’s likely a business funding option that fits your goals and cash flow cycle.
- Speed—Approvals are typically faster than traditional loans. In many cases, you can access funds within a few business days, sometimes even hours!
- Accessibility—Alternative lenders don’t put as much priority on credit scores as big banks do. Rather, they determine eligibility based on your business’s performance and potential, and often use newer risk assessment methodologies and technologies to determine your eligibility.
Transparency is also a key trait that defines alternative financing. Funders provide clear terms, fees, and repayment schedules upfront, meaning you shouldn’t have to worry about unexpected costs. As such, you can stay on top of your financial planning.
Cons of Alternative Financing
While alternative financing offers many benefits, it’s important to keep these potential drawbacks in mind:
- Higher “Interest” Rates—While not always, alternative financing sometimes has higher interest compared to traditional loans. This is because funders are taking on more risk. Here, we are using the term “interest” loosely as, in alternative financing, the cost of funding may include fees or nontraditional repayment structures that aren’t labeled as interest but function similarly.
- Shorter Repayment Terms—With shorter repayment terms, you’ll need to make larger, more frequent payments. This may be challenging if your business experiences cash flow fluctuations or seasonal changes, but could also be considered a benefit compared to the longer repayment period of most traditional loans.
- May Not Build Business Credit—Some alternative financing options don’t report to major credit bureaus, meaning your repayment activity might not help build your business credit profile. If growing your credit history is a priority, it’s worth checking whether the lender reports to credit agencies.
The key is to do your research. Compare offers and always read the fine print. And, when in doubt, ask questions. Thorough due diligence will ensure you choose the right financing solution for your business.
Ultimately, if you do your homework and fully understand the terms, alternative financing can help your business thrive.
Types of Alternative Financing
When it comes to financing your small business, there are many business financing options beyond traditional loans.
While this list isn’t exhaustive, it highlights some of the most popular and flexible ways to get the funds you need.
Invoice Factoring
Put simply, invoice factoring is a way to turn unpaid invoices into quick cash.
If delayed payments are causing cash flow issues for your small business, invoice factoring offers immediate access to funds, often in days or even hours.
Here’s how it works—you essentially “sell” your outstanding invoices to a third-party and get paid the bulk of the invoice amount upfront. They then handle the collections side of things. Once the customer pays up, you get the remaining amount, minus a fee.
The key benefits? More predictable cash flow, for one. You can also use the funds as you please. And because invoice factoring isn’t a loan, it’s a solid option for business owners who want to access flexible capital without the worries of debt, long-term commitments.
Plus, you can eliminate the headaches of chasing invoices and instead focus on growing your business.
While invoice factoring has some drawbacks—like higher fees and the potential impact on customer relationships (remember, another company will be handling your invoicing)—it remains a flexible, fast way to boost working capital.
Crowdfunding
Crowdfunding is a unique way for small businesses to raise money by tapping into a large pool of investors or backers.
Basically, this method connects entrepreneurs with a community eager to support innovative ideas.
There are different types of crowdfunding, including:
- Equity crowdfunding—Where investors buy shares in your company
- Rewards-based crowdfunding—Where you offer “free” products or services in exchange for funding
- Donation-based crowdfunding—Allowing you to raise money without having to pay it back
Essentially, you should choose the type that best fits your business needs.
In addition to the financing side of things, crowdfunding gives you the chance to test your business idea and build a community of loyal supporters. It also provides valuable exposure and marketing, putting your business in front of potential customers and investors.
But it’s not without challenges. Platform fees, competition, and the pressure to deliver on promises can add stress to your campaign. Still, crowdfunding is an exciting way to fuel business growth—if you’re prepared for the work it requires.
Business Line of Credit (LOC)
A business line of credit is like having cash on standby, ready to use at any time.
With an LOC, you borrow up to a pre-approved limit. Then, you only pay interest on what you use, so you don’t have to worry about accumulating interest on unused funds.
Not only do you get quick access to cash, but you can “reuse” your LOC as you make repayments, providing a revolving source of flexible capital for your ongoing needs.
Even better, you have flexibility to use funds how you wish—whether that’s covering short-term expenses, managing cash flow gaps, or seizing new opportunities.
Another benefit? LOCs often offer lower interest rates than credit cards. So, this method can be a helpful tool for building your business’s credit profile.
All that said, interest rates may still be quite high, and there are additional fees. You may also struggle with the temptation to over-borrow, which can create a lot of financial stress if you don’t manage it properly.
But overall, if you’re looking for flexible funds, an LOC can be a valuable alternative financing option for your small business.
Equipment Financing
Especially if you’re in the trades, you know how pricey tools and machinery can be. With equipment financing, you can get what your business needs without paying for everything upfront.
Basically, you borrow the money to purchase or lease new or used equipment, and then make regular payments over time. This spreads out the cost, so you don’t have to drain your cash reserves all at once.
Some equipment financing options even allow you to own the equipment outright after the loan term, or upgrade to newer models at the end of your lease.
All this means you can stay ahead of the curve, accessing the latest technology without having to wait years to save up. Plus, because the equipment itself is collateral, qualifying is often simpler, even if your credit history is less than perfect.
Be aware, however, that the total cost of the equipment could end up higher due to interest, fees, and other charges. And if you miss any payments, you risk losing the equipment.
However, if you need equipment now but don’t have the funds, equipment financing can be a valuable way to keep your business running smoothly, and even grow it.
Revenue-Based Financing (RBF)
If you’re looking for a flexible way to fund your business, revenue-based financing could be just what you need.
The way it works is pretty simple. You get a lump sum of cash, and then make repayments based on a percentage of your future sales.
The really great thing about RBF is that your repayments adjust based on your income. If business slows down, your payments decrease. When sales pick up, so do your repayments.
As you can guess, this makes RBF a solid choice for businesses with unpredictable income, like seasonal or growing companies. Bitty is a top funder in this space, offering quick access to flexible capital without the need for personal guarantees or collateral.
Plus, you can use the funds any way you want—whether for marketing, hiring, expanding, or something else. And since you don’t give up equity, you stay in control of your business.
Revenue-based financing doesn’t typically have a fixed repayment period. Instead, payments adjust based on your revenue. Again, this can be helpful during slower months, since you’ll owe less, but it also means repayment could stretch out longer than anticipated, keeping you in debt for an extended period.
But overall, if you’re looking for alternative financing that moves with your revenue, RBF is a smart choice for growing your business.
Choosing the Right Alternative Financing Option
Now that we’ve covered some of the most common alternative funding methods, you’re probably wondering how to determine the best one for your small business.
Before you lock in a decision, here’s a simple checklist to guide you:
1. Assess Your Business Needs
Start by asking yourself a few key questions like:
- Why do I need the financing?
- How much funding do I actually need?
- What’s my ideal repayment timeline?
- Any preferences for terms or structures?
Getting clear on these will help you narrow down your business funding options.
2. Evaluate Financing Options
Now that you’ve got a clear picture of your needs, it’s time to see which funding options check your boxes. As you research methods, look at:
- Eligibility requirements—For example, do you need collateral, or a certain number of years in business to qualify?
- Loan amounts—Do the funders you’re considering offer the amount you’re seeking?
- Rates and fees—Can your business reasonably “afford” the additional costs that come with each option?
- Terms—Do the repayment requirements align with your cash flow and goals?
Also, if you are considering a specific funder, be sure to also check out their customer reviews. Real client feedback is a great way to get a feel for a provider’s reputation. Honest feedback from other businesses can be incredibly helpful in guiding your decision-making.
3. Consider Long-Term Implications
When you’re figuring out financing, you can’t just think about the here and now, you also need to consider the long haul. Ask yourself:
- How will this financing affect my long-term cash flow?
- Will it affect my credit score down the road?
- Is this funding something my business can handle over time?
- Will this help my business grow, or just add more stress later?
By planning ahead, you’ll make a smarter, more sustainable choice for your business.
4. Seek Professional Advice
Before diving into any major financing decisions, it’s a smart idea to consult with a financial advisor or business mentor. Here’s what they can offer:
- Tailored guidance—Helping you avoid costly mistakes by offering advice specific to your unique business
- Long-term perspective—Helping you understand how your decisions today will affect your future growth and stability
- Insights into complex terms and conditions—Ensuring you don’t get stuck with a financing option that could harm your business later on
Ultimately, getting expert advice ensures you’re making the best decision for your business’s future, not just the immediate need.
Bitty: Your Partner for Fast, Flexible Funding
You’ve already done incredible things with your small business. Now, armed with your newfound knowledge of alternative financing, you’re ready to make confident, smart funding decisions.
Considering revenue-based financing? That’s our specialty at Bitty.
Every day, we proudly partner with a diverse range of small business owners to help them reach their full potential, from logistics to hospitality to retail and beyond, helping them reach their full potential.
Through flexible funding and expert support, we’d love to help you too. Learn more about Bitty Advance and apply for business funding today—it’s a short and simple three-step process to the working capital you need, with approvals in as little as 24 hours!
