The Top 10 Financing Alternatives to PPP Loans
The latest update is that any business that meets the SBA’s size standards may be eligible for a First Draw PPP Loan. Second Draw PPP loans are restricted to companies that received and spent their First Draw loan and also:
- Have no more than 300 employees
- Can demonstrate at least a 25 percent reduction in gross receipts between comparable quarters in 2019 and 2020
The takeaway is that if you haven’t gotten a First Draw loan, you can probably get qualify for one. If you’re looking into a Second Draw loan, the eligibility criteria is stricter. In that case, you may be better suited to one of the 10 financing alternatives we’ve listed below:
How Do I Get a Small Business Loan Or Other PPP Loan Alternative?
Broadly speaking, an alternative lender is any institution other than a bank or credit union that lends money. These small business lenders have lower costs than traditional lenders so they’re able to offer more accessible financing to small business owners. This makes business loans from alternative lenders a great substitute for PPP loans.
Microloans, as the name implies, are loans with relatively small amount limits. According to the SBA, their average microloan is $13,000 but may be as much as $50,000.
If you don’t need more than $50,000, a microloan could be a great PPP loan alternative for your business. Additionally, if you get a microloan and pay it off, you’ll be helping to build your credit history.
2. Merchant Cash Advances
In a merchant cash advance (MCA) the borrower receives a lump sum in exchange for a daily or weekly remittance of their credit or debit sales. MCAs can be another effective PPP loan alternative because they have relatively lenient eligibility requirements.
However, cash advances are only a good fit if you make most of your sales via debit or credit card transactions. Also, you must be prepared to make small daily or weekly remittance rather than paying larger, fixed amounts each month. For more about MCAs, read about the pros and cons of a Merchant Cash Advance.
3. Inventory Financing
If you need funds specifically for buying inventory, you should consider inventory financing. Similar to a merchant cash advance, inventory financing comes with relatively lenient eligibility requirements. However, with this type of loan, the lender uses the inventory you purchase as collateral.
If you fail to pay back your inventory loan, the lender can legally take whatever inventory you purchased. If you think inventory financing might be a good fit, find out how to apply for an inventory loan.
4. Equipment Financing
In concept and structure, equipment financing is a very similar lending program to inventory financing. However, instead of using your inventory as collateral, the working capital lender uses the equipment you purchase as collateral. Because of this structure, equipment financing also tends to be relatively easier to qualify for.
Of course, there are a lot of different things you can use equipment financing for. If you’re not sure how you could use this kind of financing, here’s 5 ways to use a business equipment loan.
5. Government or Private Grant Programs
While grants are competitive and require lengthy application processes, they’re worth keeping your eye on. If you have time, know where to look, and you’re selective about applying, you may be able to find one. Plus, if you’re awarded a small business grant, you won’t be required to pay it back like you would with a loan. Due to this, although they’re hard to qualify for, their upside is significant.
Of course, finding a good grant requires knowledge and a sound strategy. If you’re interested in learning more about grants, read this post: The Ultimate Guide to Obtaining Small Business Grants
6. Invoice Factoring
If you make sales on invoices, you may benefit from a financing option called invoice factoring.
This is a financing method in which the borrower receives an upfront portion of their invoice balance in cash. The portion of your invoices that you receive is determined by what’s called a “factor”.
Invoice factoring is a worthy alternative to PPP loans because the funding process is quick and approval isn’t heavily dependent on your creditworthiness. Instead, your approval prospects are more dependent on your customers’ credit score and payment history.
You can read more about invoice factoring in our post The Pros and Cons of Invoice Factoring.
7. Business Credit Cards
Business credit cards can be a great short-term financing option if you don’t need a large amount of funding. If you simply need to even out minor cash flow discrepancies, look for a card with the best rewards.
If you require a longer-term option, find a business credit card with a zero-percent APR period. This allows you to pay no interest for an initial period. However, after that initial period, your interest rate will be high; at least 13 percent with most credit cards.
8. Business Lines of Credit
Business lines of credit works similarly to credit cards: you borrow money up to a predetermined limit. The difference is a line of credit lets you withdraw cash as needed rather than make purchases you pay for later.
You can get a line of credit from a traditional bank or credit union or an alternative lender. Typically, it’s far easier to get approved for a line of credit with an alternative lender.
9. Bridge Financing
Bridge loans are short-term loans designed to provide financing until the borrower secures permanent financing. This type of financing is most appropriate when you need a loan to cover a funding gap. Because it only works in specific situations, it’s not the most flexible option.
However, if you’re trying to bridge the gap in between funding stages or waiting on a construction loan, bridge financing is a great option. To learn more about this funding option, check out Our Guide to Bridge Loans for Business Owners.
Conclusion: Do Your Homework on PPP Loan Alternatives
The truth is, there are numerous alternatives to SBA Loans like the PPP loan product. The key is finding the one that suits both your business needs and your personal preferences.
If you’re interested in any of the options presented above, read the expanded resources we’ve linked to. Only once you’ve researched and understood each option can you decide which makes the most sense for your goals.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.