A small business owner has been running a local bakery for over three years. Her sales are steady with positive feedback from her customers. This year, she’s planning to expand her operations by adding a second location. With this in mind, she then applies for a traditional bank loan to finance her expansion. However, her application was turned down due to insufficient collateral and limited credit history. Despite her business’ healthy cash flow, the bank deems her a risk. She needs alternative financing options.
This is the reality for many small businesses nowadays. In fact, only less than half of small business loan applications in the U.S. were approved in the last quarter of 2024, with approval rates staying just above or below 50% in recent years.
Most banks cited weak financials, poor credit history, and lack of collateral as the main reasons for denying loan applications. Only 42% of small businesses say their financing needs are fully met, which shows a big gap in available financial support. This might be because most still depend on large or small banks and are unaware of other alternative financing options.
Alternative financing refers to any type of funding that comes from non-traditional sources, such as online marketplace lending or crowdfunding, instead of banks or public financial markets. These lenders are usually more flexible, more willing to take risks, and use technology to make the process faster and easier. They often focus on serving people and small businesses who may not qualify for traditional bank loans.
Top Alternative Financing Solutions
Alternative financing options have become increasingly important as more business owners face challenges securing funding from banks. A variety of non-traditional funding methods are tailored to meet different business needs.
According to the U.S. Small Business Administration, the most commonly used alternative financing options in the country are classified into:
Online Marketplace Lending
Online marketplace lending is a digital-based financing option for accessing loans that often deliver funding decisions within just 48 to 72 hours. These platforms do not require face-to-face meetings or physical branches, as everything happens online.
With its speed, convenience, and accessibility, this alternative financing option has grown so much. For 2025, its projected transaction value in the United States is $28.29 billion, positioning the country as the global leader in this sector.
In online marketplace lending, funding comes from a mix of sources, including private investors, financial institutions, and other partners. By using advanced tools to evaluate credit risk and verify borrower information, these platforms can offer more inclusive access to financing. For small business owners who need funding quickly and can’t afford long waits or strict bank requirements, this can be a practical and effective solution.
Crowdfunding
Similar to online marketplace lending, crowdfunding is also an digital platform that involves raising small amounts of money from many investors. Common crowdfunding models include:
Donation- and rewards-based crowdfunding
Donation-based crowdfunding is where investors contribute funds without expecting financial returns. Rewards-based crowdfunding, on the other hand, is when investors give money and borrowers offer non-financial benefits, such as early product access. Due to its accessibility and being community-driven, the total transaction value in the rewards-based crowdfunding market is expected to reach $475.18 million in 2025. This makes the United States lead in this sector.
Peer-to-peer (P2P) and peer-to-business (P2B) lending
Unlike donation- and rewards-based crowdfunding, P2P and P2B lending offers financial returns to lenders in the form of interest. Online platforms connect individual lenders with borrowers, either individuals or businesses. This type of scheme makes it a widely used alternative financing method. In the United States, the total transaction value in the crowdlending market is projected to reach $7.93 billion by 2025. On a global scale, China leads the market, with an expected transaction value of $17 billion in the same year.
Equity crowdfunding
In comparison with P2P and P2B, equity crowdfunding is where investors acquire ownership in exchange of funding instead of earning through interest paid. The United States is projected to reach a total transaction value of $376.04 million in the equity crowdfunding market by 2025. Globally, the United Kingdom is expected to lead, with a projected transaction value of $643 million.
Revenue and profit sharing crowdfunding
This model offers a share of future revenues or profits, meaning payments are directly tied to the business’s financial performance. This allows borrowers to repay in a flexible and performance-based manner instead of fixed payments.
Invoice trading
In this model, businesses sell outstanding invoices to a group of investors at a discount to generate immediate cash flow. Once the invoice gets settled, the platform distributes repayments to investors and returns the remaining balance to the business.
Key Considerations When Choosing Alternative Financing
Alternative financing opens doors of opportunities for businesses to secure capital beyond traditional banks. However, just like any business decision, owners should keep the following important factors in mind:
- Advantages and limitations. Alternative financing provides faster access to funds and more flexibility in eligibility requirements. However, it may involve higher costs, such as increased interest rates or fees, and sometimes requires giving up some control or equity. With these factors in mind, it is important to weigh the benefits of speed and accessibility against the potential downsides.
- Alignment with business goals. Before choosing which alternative financing option to pursue, business owners must assess their business’s current financial condition, growth plans or objectives, and ability to repay. Different financing options work better at different stages of a business—Some are better suited for startups, others for growth and development. Therefore, choosing the option that supports long-term objectives is paramount to sustainable growth.
- Due diligence and risk management. Business owners must carefully review financing terms and conditions as well as lender credibility and reputation. It is important that business owners understand the agreements they enter into. To mitigate risks and avoid unfavorable agreements, transparency, regulatory compliance, and clear contractual obligations should be prioritized.
Every decision a business makes shapes its future trajectory: fueling growth or bringing unforeseen challenges. When it comes to alternative financing, the best option truly depends on what your business needs. Choosing the right alternative financing option is not just about securing funds but also about building a strong foundation for lasting success.
By understanding the specifics of each financing option and ensuring it aligns with business priorities, companies can better position themselves to thrive amid evolving market conditions. The choices made today will shape the possibilities of tomorrow.
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