Wooden Blocks with the text: FinanceSmall business owners who encounter trouble securing traditional loans have an ever-increasing array of alternatives to choose from.

Established banks working through the U.S. Small Business Administration offer the lowest interest rates on small business loans, but it’s tougher for entrepreneurs to obtain financing if their business is too new or too risky. Nontraditional lenders have stepped in to provide easier-to-obtain business loans for such entrepreneurs. The terms of this type of financing can vary widely, but expect to pay more for this speedier, easier option.

If you’re looking for a new source of cash for your business, consider these nontraditional financing possibilities.

Online Lenders

Online lenders are unregulated, nonbanking companies that provide a range of financing options to small businesses. Loans from online lenders are easier to get because they use a combination of traditional underwriting metrics and nontraditional factors, such as accounting data and social media performance. Financing decisions are delivered more quickly than with traditional loans, but the tradeoffs for that convenience include higher interest rates and fees. Online lenders typically offer term loans, lines of credit and accounts receivable financing.

Peer-to-Peer Lending

A peer-to-peer lender acts as an intermediary between you and a third-party individual or institutional investor. It’s a type of online financing in which the lenders match borrowers with investors who are looking to earn a rate of return for their loan. After an investor agrees to fund your loan, the lender will transfer the amount directly to your bank account. You’ll then repay the lender according to the terms of the loan. The lender, in turn, will repay the investor. It’s an increasingly popular option among small businesses for its ease of approval. However, that simplicity will come at a price in the form of a higher APR.

Accounts Receivable Factoring

Business-to-business companies with slow-paying customers can use accounts receivable factoring to manage their cash flow. An accounts receivable or invoice factoring company will purchase your outstanding invoices at a discount in exchange for a cash advance. The purchase comes with a factor rate, typically ranging from 1% to 5%. The rate determines the total fee you’ll pay on the cash advance. For example, if you have an advance of $10,000 and your factor rate is 2%, you’ll pay the invoice factoring company a fee of $200. To repay the loan, you set up a new bank account, then notify the customers whose invoices you sold where to send the money they owe.

Microlending Organizations

Microlending organizations are nonprofits that offer small loans, known as microloans. This service is aimed at entrepreneurs who can’t access traditional loans, like those from banks. Microfunding organizations also provide one-on-one assistance and guidance for small-business owners to help them succeed. For example, the microloan program through the Small Business Administration provides loans up to $50,000. The average microloan through the administration is $13,000.


Through crowdfunding, you can raise money for your small business by creating an online financing campaign. The money you raise isn’t a loan, so you don’t have to repay your investors. Typically the crowdfunding platform will take a small percentage fee of the funds raised and possibly a payment-processing service fee. On most crowdfunding platforms, you’ll receive funds only if you reach or exceed your goal.

Small business owners can use two kinds of crowdfunding. With rewards-based platforms, you incentivize contributors with perks, such as a sample of your product. Equity-based crowdfunding operates more traditionally — you provide shares in your company in exchange for funds.

Retirement Funds

Borrowing from your 401(k) is a risky option, but it can pay off for your small business. The loan can amount to 50% of your vested account balance or a maximum of $50,000. But, if you can’t pay back the amount borrowed within a specific time frame, the loan will be considered an early withdrawal. In that case, you’ll have to pay taxes and possibly penalties on the remaining amount of the loan. This option is feasible only if you’re currently employed and have an active 401(k).

A much riskier option is to use a rollover as business startup, or ROBS. It’s a loophole in the tax system that involves creating a C corporation and moving your 401(k) funds into a newly created 401(k) plan that offers employees investment opportunities in the company. Your retirement funds can then be invested into the new corporation and used as working capital. ROBS has benefits, but is hard to recommend because it is burdened by complicated regulations, tax risk and the potential to lose your entire retirement fund to the IRS. In fact, the IRS reported preliminary findings from a 2010 compliance project that most businesses started with ROBS funding either failed or were on the road to failure.

Merchant Cash Advance

While you should always consider other financing options first, a merchant cash advance can provide your business with a fast loan. With these advances, a percentage of your credit and debit card sales are withheld for daily repayments. Merchant cash advances are unsecured, don’t require collateral and have high approval ratings. But you’ll also pay high APRs — in the triple digits — and how quickly you can repay depends on the strength of your business’s debit and credit card sales. Fee amounts are fixed, so even if you pay back the loan early, you won’t save on interest.

Anna Helhoski is a staff writer at NerdWallet, which provides clarity around decisions that help you start or grow your small business. We provide clear unbiased information, entrepreneur-focused advice, and tools for small-business loans, tax and legal issues. We also connect you with experts who can answer questions about growing your small business.