7 Small Business Alternative Funding Options

As the economy slowly improves, the small business credit market continues to evolve. Large banks still have low approval rates for their loans, but small banks are filling in the void and approving over half of the business loan applications they receive.

Alternative lenders still fill gaps for small businesses as well as entrepreneurs seeking start up or expansion capital, granting start up business loans and business loans for bad credit. Despite improvements, most small business owners know that walking into a large bank for an easy loan is a thing of the past, but there are still options.

1. Purchase Order Financing

Purchase order financing has become always been popular. These small business loans involve a third-party finance company, which pays the factory to manufacture goods for the small business. When the financier is paid, it receives a commission and delivers the goods to the business.

2. Peer-to-Peer Lending

This is a fairly new form of the microloan. Instead of turning to a bank or credit union sponsored by a microloan program, business owners can turn to peers for smaller, short-term loans. Online lending clubs will assess the business' risk using the same type of credit scoring a bank would use, but individual investors may choose to participate in a high risk loan for a higher return on investment. Investor risk is limited by pooling numerous contributions, sometimes as low as $50, and borrowers repay the loan through the website.

3. Cash Advance Loans

These business loans for bad credit are not start up business loans, but are instead available to established businesses. Small businesses can obtain funding quickly and pay it back over time in installments that come right out of future sales.

4. Crowdfunding

Crowdfunding is actually a type of investment that allows almost anyone to participate, even in small amounts, and businesses gain access to a diverse number of opportunities. This option is especially popular with entrepreneurs, but it requires a unique or interesting business idea that people can get behind.

5. Cash Flow Financing

These small business loans are for established businesses with bad credit. Rather than a credit-based loan, an alternative lender uses the expected cash flow of the business to provide money for expansion or other needs.

6. Factoring

Factoring is definitely one of the most popular alternative small business loans, as it allows owners to tie repayment of the loan right into business receivables. Factoring lets small businesses draw money from outstanding invoices and, instead of working with a bank, they apply to a firm called a factor. Restaurants and other service businesses may participate by running credit card transactions through the factor's merchant terminal. The factor will receive a share of the money and deposit the rest into the business bank account.

7. Microlending

Finally, many cities and areas have created a lot of small business growth by sponsoring microlending programs. Microloans are usually smaller than regular small business administration loans, and most businesses that apply do not qualify for a corporate credit card due to lack of business credit history or a high-risk location.