Raising funds is usually near the top of the list of things founders are most worried about.

And for good reason. Without funding, it’s impossible to develop new products, expand into new markets and hire talent. Bank loans used to be the go-to option for  a cash injection. However, their demanding eligibility criteria and lengthy application process has left many business owners “out in the cold” over the years.

Nowadays, other sources of capital from alternative lenders have become increasingly popular, helping you get access to cash faster than ever before.

At Uncapped, we believe founders shouldn’t have to wait on approvals or make personal guarantees to fund their online business’s growth. 

In this article, we’ll explore bank loan alternatives and cover their advantages and drawbacks. We’ll ultimately help you decide which funding source is best to grow your business effectively.

What are the alternatives to bank loans?

We’ll be exploring five main alternatives to bank loans. These are:

  • Investment Capital
  • Business Credit Cards
  • Merchant Cash Advance
  • Unsecured Business Loans
  • Equity Finance
Alternatives to bank loans
Uncapped is a faster and more flexible alternative to other options

Revenue-Based Investment Capital: Funding for Sustainable Growth

Revenue-based finance sees lenders finance companies in exchange for a percentage of their future revenue. For example, if a company takes out a $100,000 loan, they may agree to pay back 5% of their revenue every month until the loan is repaid, plus a monthly fee.  

We offer revenue-based finance, so we’ll use our terms as an example of how this type of funding works:

  • We offer investment capital ranging from $10k to $5m.
  • The application process is much far simpler than applying for a bank loan. Instead of filling out forms, sharing business plans and growth models, we just connect to your back-end systems and get back to you with an offer within 24 hours!We charge a flat fee of 6-12% on the capital provided and get paid back through a revenue-share model. No interest or hidden fees.
  • Our revenue-based capital option does not require founders to offer collateral, nor do we ask for equity in your business. Uncapped allows small online businesses to retain full control in their company and grow on their own terms. This helps them save millions in dilution.

Once accepted, you can access your funds via a Visa credit card or a transfer to your company’s bank account. We agree on a percentage of revenue with you, which you will then share with us until the loan and flat fee is repaid.

That means if the market slows or your sales drop, your repayments will slow (or stop) too. That’s great for businesses that are affected by things outside of their control (like a global pandemic).

Revenue Based Finance in Action: GRNDHOUSE

Uncapped is also perfect for businesses that are looking for a quick alternative to bank loans. For instance, Berlin-based petcare brand Vetevo used revenue-based financing to fund their way to getting 200,000 customers after several banks weren’t flexible enough to approve funding for their marketing campaigns.

Revenue-based financing works with other funding types too. Take UK-based fitness app GRNDHOUSE for example. The business used Uncapped to grow app subscribers and get in better shape ahead of a seed round. 

Louis, GRNDHOUSE’s founder, saw this as the better alternative to bank loans because the process was quicker and didn’t require him to jump through as many hoops.

With our help, they grew acquisition so were able to negotiate better terms and give away less equity when they raised almost $2m from investors.

Business credit cards: For short-term set up costs

Often a preferred source of short-term financing, business credit cards work in a similar way to consumer credit cards. To qualify, you’ll need a decent credit score ( in the good-excellent range according to FICO), and lenders will offer you better terms depending on your company’s performance.

The average credit limit for small business credit cards stands at around $56,100 – according to research from Experian

A business credit card is best for purchases involved in starting up or growing your business. Keep in mind that many lenders impose limits on how much of your credit you can withdraw in cash.

Compared to a bank loan, credit cards are far easier to get approval for. You don’t need a business plan and you can get accepted within just a few minutes.

If you pay back your credit within a certain length of time (often 60 days from your credit card statement), you won’t pay any interest on the debt. Usually, business credit card users can enjoy low interest rates - between 10% to 35% - depending on your credit card company and the part of the world you’re based in.

Credit card companies also bundle in extra benefits like cashback options, expense tracking and rewards programs.

Business credit cards are a great source of short-term financing for purchases and everyday costs for your business. They are great for paying for business travel, office supplies and equipment, but low credit limits mean they’re not a great source of funding if you need more than about $25,000.

Merchant Cash Advance: Revenue Based Financing for offline businesses

Merchant cash advances provide businesses with cash in exchange for a percentage of that business's future sales. This type of financing is similar to revenue based finance, however, is used by offline businesses such as restaurants which may see fluctuations to sales.

There are several key differences between merchant cash advances and bank loans:

  • The most obvious difference is that a merchant cash advance does not require collateral.
  • The approval process for a merchant cash advance is much faster than a traditional bank loan.
  • Most businesses can borrow up to $500,000 with a merchant cash advance. The amount you can borrow will depend on your credit rating, your projected sales, and the size of your business.
  • The amount businesses have to repay is decided with a factor rate – a multiplier that varies with your business’s credit score. The average factor is between 1.1 to 1.3 per month. Your business will need to pay your lender a set percentage of your sales until this repayment amount is paid off, which is usually 5% to 10% of sales.

The repayment term is an estimate based on the time your lender believes it will take for you to pay back the loan. If your sales grow faster than expected, your advance will be paid off faster. For example, a business borrowing an advance of $10,000 with a factor rate of 1.25 will need to repay $12,500 after a month.

Lenders prefer to invest in small businesses with predictable sales. To apply for a cash advance, you’ll need to submit information about your business’s performance and projected sales growth.

Unsecured business loans: For fast-growing startups

An unsecured business loan is not backed by any form of collateral. This means that the lender has no way to recover the money if the borrower fails to repay the loan. Unsecured business loans are typically smaller than secured loans, and have a higher interest rate. However, they can be a great option for businesses that don't have any collateral to offer or those who need money quickly.

Because lenders are taking on extra risk, banks usually ask for a shorter repayment term too. This ranges from around 12 months to 2 years, while interest rates usually range from around 15% to 25% ARR.

Equity Financing: Best for figuring things out

Equity financing is when a company dilutes ownership in exchange for capital. This type of financing is often used by small businesses because the company is not required to pay back the loan with interest, as with a traditional loan. 

Equity financing is perfect for startups  that still need to hire the right team, build the right product, and test how they reach markets.

For early-stage businesses, this is usually provided by angel investors and, later on, by venture capitalists.

Equity financing gives small businesses the capital they need to grow. Angel investors and VCs can also help companies by offering expertise and access to their professional networks, extras you’d never get with a business loan. For some founders, this helps make their diluted ownership worthwhile.

Another disadvantage is that equity investors typically want to see  your business grow at a fast pace, which may not suit your business, or your own lifestyle.

Which bank loan alternative is right for me?

There’s no ‘correct’ alternative to bank loans, there’s only the right option for the position your business is in right now. 

Broadly speaking, businesses that need a large tranche of capital for non-revenue generating activity should opt for equity finance, while businesses that want to invest in activities that generate predictable revenue - such as marketing or purchasing inventory - would be better off with revenue-based financing.

Credit cards and unsecured loans can plug some of the gaps in between, but they’re generally less effective than the bank loan.

Access same-day no-equity, no-security capital today!

Uncapped has already helped more than 500 online businesses get funded in over 22 countries since we were founded in 2019. 

Our fair and flexible approach to funding allows you to rightfully keep full ownership of your company, making Uncapped funding perfect for SMBs who want to avoid diluting equity or waiting for approval on a loan.

Head over to weareuncapped.com to see if you qualify.