When you’re seeking money to expand your business, a bank loan is likely the first funding source that comes to mind. But traditional lending institutions typically have stringent internal and regulatory standards that can make it difficult for small businesses to secure a loan.
That’s where alternative lending comes in. Alternative lenders offer other ways to get financing—often faster and easier than a traditional bank loan. This relatively new type of lending can be especially beneficial for ecommerce brands.
“There are lending tools to access for early-stage businesses, specifically ecommerce, that didn’t exist until two or three years ago,” says Matthew Scanlon, founder of cashmere company Naadam, on a Shopify Masters podcast episode, mentioning accounts receivable financing and accounts payable financing specifically. “There’s a very low threshold for acquiring that level of financing, but it’s an offset to improve your cash flow, which is really part of the challenge for financing an early-stage consumer business.”
Fintech tools offer accessible cash quickly and with fewer requirements than traditional banks, and they can help early-stage businesses and extend their cash flow. Here’s what you need to know about alternative lending.
What is alternative lending?
Alternative lending refers to any type of financing from lenders other than traditional lending institutions like banks and credit unions. Alternative lenders include financial technology companies, online lenders, community development financial institutions, and other nonbank lenders. The loans that fall under alternative lending are typically designed for small business owners who need funds quickly, don’t qualify for traditional bank loans, or have unique business needs.
Many alternative lenders operate fully online and use technology to streamline and speed up approval. During the underwriting process, alternative lenders often use software that integrates with the business’s bank accounts, ecommerce platform, or accounting software. After analyzing the business’s transactions, the lender can evaluate its risk and set lending terms more quickly than a traditional lender.
For example, Shopify users have access to Shopify Capital, which offers financing based on your store’s performance. Loans are repaid as a percentage of your daily sales, which means payments flex with your revenue. Eligible merchants receive offers directly in their Shopify admin, with a fast application process and no lengthy paperwork.
Alternative lending vs. traditional lending
Both traditional and alternative lending involve borrowing money to cover business expenses. The key differences relate to how the borrower is evaluated, how quickly they can access funds, and the cost of that speed and flexibility. Here are the key areas of difference:
Lending process
Alternative lenders include fintechs, online lenders, and other nonbank lenders. Each may have different funding processes. They may lend directly to small businesses, connect borrowers with lenders, or partner with banks to issue loans.
Most alternative lenders use digital platforms to collect loan applications, screen borrowers, and provide fast responses. Many approve and provide funds in as little as one business day, making them a popular choice for quick working capital. They may also offer flexible repayment options. For example, merchants may be able to repay a loan by letting lenders take a cut of future card sales.
Traditional lenders include banks and credit unions. While alternative lenders offer a variety of loan types, traditional lenders often confine their offerings to term loans and lines of credit. The approval process is often slow, requiring extensive document collection, manual underwriting, and approval by a loan officer. Repayment is more regimented, with the borrower typically making set installment payments that include the principal—the amount borrowed—and interest.
Eligibility requirements
Alternative lending options usually require less documentation, have flexible time-in-business standards, and accept lower credit scores. These requirements make qualifying easier. Alternative lenders typically place weight on:
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Recent revenue performance and cash-flow patterns
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Invoices or accounts receivable
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Inventory and other business assets
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Sales data and payment history (common for ecommerce and merchant financing)
Meanwhile, traditional lenders often have stricter business loan requirements, such as two years or more in business and personal credit scores of 700 or higher (850 usually is the maximum). These lenders typically prioritize:
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Time in business
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Historical and current monthly revenue
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Profitability and cash flow
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Collateral and/or personal guarantees
Average interest rates
Many online lenders charge higher interest rates than banks—sometimes 30% or more, four times more than the average bank rate—to account for increased risk. Certain alternative financing options are especially expensive for borrowers with lower credit scores or for urgent funding needs where demand lets the lender charge higher interest.
That said, not all alternative lenders have high interest rates. For example, nonprofit community development financial institutions (CDFIs), which focus on underserved areas, use private and federal government funding and often offer rates closer to those at banks. Businesses in underserved areas or those willing to trade speed for lower borrowing costs may find CDFIs worth exploring. The trade-off is that loan amounts may be smaller and approval can take longer.
Loan amount
Traditional lenders tend to offer larger loan amounts than alternative lenders—especially for established businesses with strong credit and steady cash flow. Depending on the borrower profile, it’s possible to get loans for several million dollars.
Alternative lenders typically offer smaller amounts, from a few thousand dollars up to a few hundred thousand, with limits tied closely to your recent revenue, inventory, or receivables.
Funding speed
Speed matters when you’re managing inventory cycles, marketing windows of opportunity, or seasonal demand and you don’t have the luxury of waiting for loan approval.
The traditional loan application process often stretches over a few weeks or months. That’s because banks tend to rely on extensive documentation and manual underwriting, requiring that a lending officer grant approval. SBA loans, for example, can take as long as 90 days to fund.
Alternative lending usually processes applications online with automated underwriting, so you may get a decision and funding within one business day. Many online lenders also provide prequalification tools, which help you estimate terms before submitting an application.
Types of alternative lending
- Term loans
- Business lines of credit
- Asset-based loans
- Invoice factoring
- Purchase order financing
- Merchant cash advances
- Peer-to-peer lending
Alternative lenders for small businesses include fintechs like Fora Financial, Fundbox, and Bluevine, as well as merchant financing from sources like Shopify Capital or PayPal Working Capital. Here’s a closer look at common alternative lending options and which businesses they suit best:
Term loans
Some alternative lenders offer term loans, which provide a lump sum of cash upfront. You repay the balance through installments during a set period, usually 24 months, with a fixed interest rate. An ecommerce brand might use a term loan to fund a product launch or rebrand where the full cost is known in advance.
Best for: Businesses that need working capital or funding for a one-time expense.
Business lines of credit
A business line of credit lets you draw funds as needed, up to a predetermined limit. You only pay interest on the amount you borrow and can repay the money over a set time frame—and you can borrow as often as needed.
Best for: Small businesses operating on a tighter budget that need immediate funding.
Asset-based loans
An asset-based loan (ABL) is a term loan you use to buy inventory and large assets like equipment, heavy machinery, and real estate. The asset serves as collateral, which means the lender can seize and sell it if you default on the loan.
Product-based and inventory-heavy businesses often use this type of alternative lending. “I’d say for most consumer brands, ABL structures are very interesting,” says Naadam founder Matthew Scanlon. “They’re asset-based loans, meaning they lend to you against a percentage of your available inventory for the cost of your inventory.”
These loans may come with higher credit requirements and more documentation because the lender needs to evaluate the collateral.
Best for: Larger businesses with sufficient credit and hard assets such as equipment or inventory to borrow against.
Invoice factoring
Invoice factoring involves selling invoices to a third party—often referred to as a factoring company—in exchange for cash. The factoring company then takes on the responsibility of collecting payments from your customers on your behalf. This type of accounts receivable (AR) financing comes with a flat fee that typically ranges between 1% and 5% of the invoice amount.
Eligibility often depends on the credit scores of a business’s customers and clients rather than the credit score of the business itself. This feature could make invoice factoring easier to qualify for.
Best for: Companies that invoice for goods or services sold to other businesses.
Purchase order financing
Purchase order financing or accounts payable (AP) financing is a type of short-term business funding that helps you pay suppliers after you’ve received a confirmed customer order—but before your customer pays you.
Instead of lending cash directly to you, a financing company pays your supplier to produce or ship the goods. The supplier then delivers the goods directly to your customer, who sends payment to the financing company. You receive any remaining balance after the financing company subtracts its fees.
These tools are designed to solve timing problems, not demand problems. As Matthew explains, flexible payment options like purchase order financing exist to improve your cash flow—a major challenge for early-stage consumer businesses.
Best for: Businesses with solid receivables but uneven cash timing.
Merchant cash advances
A merchant cash advance (MCA) provides a lump sum of cash upfront that’s repaid through a percentage of future sales. Instead of an interest rate, MCAs usually come with a factor rate that determines your total borrowing cost at the outset. For instance, a 1.2 factor on a $10,000 advance means you repay a total of $12,000.
The lender typically takes a percentage of your credit and debit card sales on a daily or weekly basis until the loan and any fees are paid. This feature offers flexibility since payments adjust based on sales volume. Some lenders require merchants to pay a periodic minimum or set repayment deadlines.
Best for: Small businesses that accept card payments from customers.
Peer-to-peer lending
Peer-to-peer (P2P) lending connects borrowers directly with individuals or companies that want to invest their money. Online P2P platforms make this possible by matching your company to the appropriate investor, based on details like the loan amount, creditworthiness, and business projections. In exchange for the service, you’ll typically pay an origination fee either to the platform or the lender.
After you’re approved, multiple investors can each fund a portion of your loan until you get the full amount you need. Like a standard term loan, you repay the balance with interest over a set period. The lender earns a return through the interest baked into your monthly payments.
P2P lending can be a viable path for newer businesses that lack the credit history or collateral traditional lenders require, though interest rates vary widely depending on your risk profile.
Best for: Newer businesses that lack the credit history for traditional financing and prefer investor-backed funding over asset-based or sales-based repayment structures.
Alternative lending FAQ
Is alternative lending the same as private credit?
Not exactly. Private credit firms raise billions of dollars from pensions, insurance companies, and endowments, then make large, negotiated loans to a limited number of companies. Alternative lenders use technology and nonbank capital to make many small loans quickly.
What is the alternative lending market?
The alternative lending market is broadly the ecosystem of nonbank financing, which includes platforms and lenders providing credit outside traditional banking.
How do alternative loans work?
It depends on the product. A term loan, for example, provides a lump sum of money that’s repaid over time, while a merchant cash advance involves repaying a cash infusion through a percentage of future sales. No matter the structure, the fundamentals stay the same.
*All loans through Shopify Capital Loans are issued by WebBank. Offers are subject to change based on several factors including your store's performance and the review of your financial information. Shopify Capital Loans must be paid in full within 18 months, and two minimum payments apply within the first two six-month periods. Offers to apply do not guarantee funding. Repayments are made based on a percentage of daily sales.
