The Advantages & Disadvantages of Alternative Lending Companies for Small Businesses

Canada Small Business Financing Program (CSBFP) loans and other traditional lenders like banks or credit unions are often the first choice for small business owners who are seeking funding. These popular funding partners offer a number of advantages—better terms and lower fees, for example—but many business owners don’t meet their stringent approval requirements and most applicants are rejected.

Not receiving the funding you need from the CSBFP or a conventional bank doesn’t mean you’re stuck financing your business’s growth through personal loans or investments from friends and family. Businesses can still access the funding they need through a comparatively new source of non-bank lenders called “alternative lenders”.

Alternative lending companies emerged after the 2008 recession in response to greater need for accessible funding. These lenders (including Greenbox Capital®) have continued to expand in the years since, and they now offer a number of unique lending options that make funding more accessible for small business owners who are typically underserved by the government funding programs and other traditional lending institutions.

Since alternative lenders are a relatively new funding source compared to stalwart institutions like the Canada Small Business Financing Program or your local bank, many business owners may have misconceptions or misgivings about the type of funding these lenders offer. While it’s true that the CSBFP and other traditional lenders offer the most favourable terms, alternative lenders offer a number of other compelling advantages, including simpler applications, faster turnaround, more funding options, and fewer restrictions on how you use your funds.

Before we dig deeper into the advantages and disadvantages of alternative lenders, let’s take a closer look at what “alternative lending” actually means.

“Alternative lending” is an umbrella term that describes any lending that occurs outside of a traditional financial institution like a bank or a credit union.

These lenders use new technologies to support the underwriting process, which in turn allows them to provide a streamlined application that is ideal for business owners who typically would not be approved by traditional lending institutions, such as:

• Business with strong financials that simply don’t meet the stringent requirements of the Canada Small Business Financing Program or a bank
• Businesses looking for smaller loans
• Businesses in “high risk” industries
• Women-owned, veteran-owned, or minority-owned businesses
• Businesses with low credit

There are multiple types of alternative lenders, including:

• Direct Online Lenders: Direct online lenders (including Greenbox Capital) offer financing directly to small business owners using a fast and easy online application. These lenders have simpler and more flexible underwriting requirements so more businesses are approved and funding can be deposited in as little as one business day. Several small business financing options are available from direct online lenders, including loans for smaller amounts, asset-backed financing, purchases against future receivables, and more.
• Private Lenders: Private lenders use their own money to issue loans, rather than funds from investors or depositors.
• Marketplace Lenders: Marketplace lenders leverage technological platforms to connect borrowers directly with investors without involving a bank.
• Crowdfunding: Crowdfunding is especially popular for startups or businesses in the prototype phase. Operated using online platforms like Kickstarter, crowdfunding enables businesses to raise small amounts of money from a larger number of investors in exchange for rewards or equity.

Next, we’ll take a closer look at the advantages and disadvantages of alternative funding supplied by direct online lenders like Greenbox Capital.

Direct online lenders offer small business owners a number of advantages, including simplified applications, faster turnaround, more loan options, and fewer restrictions on how funds are used.

Alternative online lenders offer a significantly streamlined online application that takes minutes to fill out. Unlike the CSBFP and traditional lenders, alternative lenders don’t require detailed paperwork documenting multiple years of your business’s financial history. In some cases, these lenders can even review and approve your application just using digital access to your business’s bank statements.

The easier application process makes alternative lenders an ideal funding choice for busy business owners who may not have the time to compile the mandatory paperwork required by other lenders, especially as they focus on day-to-day operations, growth, or reopening and recovering from COVID-19 restrictions and closures.

Traditional lenders typically need weeks or even months to process an application and deposit funding. Thanks to their streamlined underwriting process, alternative lenders can approve an application and deposit funding in as little as one business day.

This faster turnaround makes alternative lenders ideal for businesses that need quick funding in order to take advantage of a short-lived opportunity, or business owners who otherwise don’t have the time to navigate the lengthy application process of government funding programs or a bank.

Along with traditional funding types like lines of credit and collateral loans, alternative lenders also offer additional loan options based on unique criteria, such as asset-backed financing and purchases against future receivables. The diversity of loan options available also enables these lenders to grant loans for smaller amounts—sometimes as little as $3,000.

This flexibility makes alternative lenders the ideal choice for businesses seeking smaller loan amounts, as well as for businesses who have assets like unpaid invoices or strong daily sales that can be used to secure working capital.

Some lenders place strict restrictions on how you can use your funding and require you to submit a detailed plan for how your funding will be used. Alternative lenders typically don’t have such stipulations, allowing you to use your funding however you believe makes the most sense for your business. Some forms of alternative lending, such as equipment or inventory financing, can only be used for certain purposes, but the majority of alternative lending options, including merchant cash advances and online invoice factoring, have no restrictions on how the funds are used.

The freedom to use your funding however you feel is necessary makes alternative funding an ideal option for businesses who need working capital to support day-to-day operations, fill in cash flow gaps, or fuel their business’s growth without a specific purpose, such as buying real estate or equipment.

The streamlined application and underwriting process makes alternative business loans easier to acquire, but it also means they pose more risk to the lender. For this reason, they come with higher rates, shorter terms, and more frequent payments.

Because risk assessment and approval requirements are more lenient than traditional lenders, alternative financing options like merchant cash advances, invoice factoring, or other forms of small business funding often come with higher rates and fees.

When you work with an alternative lender, your rates and fees will depend on the health of your business and sometimes on the type of funding being sought. Instead of a standard interest rate like the Canada Small Business Financing Program and banks charge, some alternative lenders will use something called a “factor rate”. Unlike interest rates, which can compound as you pay off your loan, a factor rate is a simple decimal figure that shows how much “extra” you will owe on the original amount of the loan. For example, if you borrow $1,000 at a factor rate of 1.5, you’ll owe $1,500.

Some forms of alternative funding come with shorter term lengths than traditional funding options, even if they are for the same or similar amounts. This doesn’t necessarily mean your funding will cost more over the term of your loan—it simply means you will have higher installment payments in order to repay the loan in a shorter period of time.

Depending on the type of funding you receive, your payments may be as frequently as daily or weekly. Merchant cash advances, for example, are typically repaid daily or weekly based on a percentage of your business’s credit card sales. Payments are often collected automatically so you don’t have to worry about remembering to make payments. Other forms of alternative business funding, such as a line of credit, may use a traditional monthly payment plan.

Every business’s circumstances and funding needs are unique, but there are a number of common instances when alternative lending makes sense for your business:

The CSBFP and other traditional lenders require business owners to complete an extensive application that can take weeks or months to process, all with no guarantee of approval.

In some cases, a small business owner may not have the time to navigate this process, or they may need funding to take advantage of an unexpected and short-lived opportunity to grow. With a streamlined application process, alternative lenders can approve and deposit funds in as little as one business day, providing business owners with fast working capital when they need it.

A business can still be disapproved by the government funding programs or a bank even if they have healthy cash flow and a strong financial history. Low credit, whether it’s low personal credit or you’re still building your business’s credit score, can also overshadow even the best business financials.

Alternative lenders focus on the health and potential of your business, which means they can approve funding for businesses with a wider variety of financial histories, including low credit scores. Your business’s credit and financial history will still be factored into your application, but they will be considered alongside other factors like cash flow, vendor payment history, and public records to help determine the overall health of your business.

Most traditional lenders will reject loans for smaller amounts, instead preferring to grant larger loans that will make them more money over the term of the loan.

Alternative lenders have more flexibility and are more likely to approve loans for smaller amounts, sometimes as low as $3,000, making these lenders a fitting choice for business owners who aren’t seeking a large loan.

Canada Small Business Financing loans are available to startups, but traditional lending institutions like banks require applicants to be in business for a minimum of 2 years.

Alternative lenders will consider applicants who have been in business for as little as 6 months, making these lenders an ideal option for newer businesses looking to expand on their early success.

Traditional lenders are less likely to grant loans for businesses in higher risk or declining industries.

Alternative lenders focus on a wider variety of approval criteria, and are therefore able to grant loans to industries traditional lenders would consider to be too risky.

Alternative funding offers a number of advantages over financing options offered by traditional lending institutions, including a simplified application, faster processing and approvals, and unique financing options that suit the needs of your business.

Many types of alternative funding are available to businesses who need funding quickly, don’t meet the strict criteria of the Canada Small Business Financing Program and other traditional lenders, or would prefer not to seek funding from friends or family members. With funding from as little as $3,000 up to $500,000, business owners can access alternative funding that suits their unique needs, including merchant cash advances, term loans, online invoice factoring, and business lines of credit, as well as unique funding options like crowdfunding.