Alternative Lending: Overview and Top Companies

Alternative lending can be a great option if you’re unable to secure a business loan from a bank, though the rates and terms may not be as favorable.

Alternative lending, sometimes referred to as online or fintech lending, involves loans provided by nonbank lenders. These lenders don't take deposits and typically operate exclusively online, using technology-driven underwriting processes to make credit more accessible and expedite loan approvals.

Because of this approach, alternative lenders usually have more flexible qualification requirements, faster applications, and quicker funding times compared to traditional lenders. However, they tend to charge higher interest rates and have shorter repayment terms.

Below, we break down how alternative lending works and provide insights to help you decide if it’s the right choice for your small business.

How Alternative Lending Works

Alternative lending started with peer-to-peer consumer loans and grew out of the funding gap left by traditional financial institutions during the Great Recession. Today, it is a popular solution for both consumer and small-business loans.

Nonbank lenders in the alternative lending space may:

• Raise their own funds and lend directly to small businesses,

• Connect borrowers with investors, or

• Partner with banks to originate loans.

Common types of alternative lending products include:

• Term loans

• Lines of credit

• Equipment loans

• Invoice factoring

• Merchant cash advances

These lenders primarily operate online, utilizing technology to underwrite, price, and issue different types of business loans. While traditional lenders often rely on manual reviews to evaluate loan applications, alternative lenders use digital data sources like bank accounts, merchant accounts, or accounting software to determine your creditworthiness.

Differences Between Traditional and Alternative Lending

Alternative lenders are known for their streamlined application processes and fast funding times. However, these benefits come at a cost—higher interest rates compared to traditional banks. If you can qualify for a traditional loan, you’re more likely to receive lower interest rates and more favorable repayment terms.

Here’s a quick comparison of the key differences:

• Application Process: Alternative lenders use online applications that are typically quick and easy, whereas traditional lenders may require a more extensive application process.

• Funding Speed: Alternative lenders can often provide funding within days, while traditional banks may take weeks.

• Qualification Requirements: Alternative lenders have more flexible requirements, making them a viable option for businesses with less established credit.

• Rates and Terms: Traditional lenders offer lower interest rates and longer repayment terms compared to alternative lenders, who tend to have higher costs associated with their loans.

If you’re looking for more flexible requirements and need funds quickly, alternative lending might be the best fit for your small business. However, if you qualify for traditional financing, it’s generally a more cost-effective option.