Small and medium-sized enterprises (SMEs) are the backbone of the American economy, driving innovation, creating jobs, and fueling the workforce.
Yet, despite how much the economy relies on SME success, traditional funding sources are often hesitant to provide the necessary capital, leaving entrepreneurs to confront major hurdles along their journey to success.
This is where alternative funding comes in: Flexible funding solutions, tailored specifically to the unique needs of smaller enterprises.
In this article, we’ll look at the essential role of SME funding in today’s economy, explore a range of funding options available to entrepreneurs, and reveal how technology is revolutionizing the way small enterprises can access the capital they need to thrive.
The Problem With Traditional Funding for SMEs
When it comes to their influence on the economy, SMEs pack a much bigger punch than their name suggests.
Today, SMEs account for 99.9% of all U.S. firms, making up nearly 35 million businesses while:
- Creating over 70% of net new jobs in the U.S. since 2019.
- Representing 97.3% of all exporters.
- Contributing 43.5% of the country’s gross domestic product.
For SMEs to prosper, they invariably need access to capital.
Unfortunately, securing traditional funding from banks and credit unions has become increasingly difficult for SMEs in recent years:
- In 2024, a staggering 77% of small business owners in the U.S. were concerned about securing capital.
- A Federal Reserve survey found more banks restricting access to loans, making it harder for SMEs to qualify for credit than ever before.
- Meanwhile, loan approval rates for small businesses have remained around the 50% mark for years.
With fewer enterprises able to secure loans, owners are turning to personal funds to cover expenses. In fact, one Fed Small Business survey shows that more than half of business owners rely on their personal savings to support their ventures.
Ultimately, rigorous application processes, strict credit requirements, and long approval times have made it increasingly difficult for SMEs to secure traditional funding.
Consequently, these obstacles have made alternative funding options an absolute necessity.
Here’s a picture of just how important alternative funding has proven to be: The global alternative financing market was valued at $173.9 billion in 2022, and researchers predict it could reach $920.9 billion by 2032.
Benefits of Alternative Funding for Small Enterprises
As long as alternative funders support SME aspirations and fuel their success, SMEs will continue to drive innovation and economic growth. That’s the big picture.
And while traditional funding will always have a role to play in the financing landscape, alternative funding provides SMEs with a number of advantages.
1. Flexible, Tailored Solutions
Traditional funding has pretty much the same rules for everyone.
But alternative funders truly understand the unique needs and challenges faced by SMEs. As such, they are more open to customizing funding terms and repayment schedules to align with the specific requirements of each enterprise.
2. Fast Access to Funds
Time is often of the essence for SMEs in need of capital. Thanks to alternative funding platforms, the SME funding process is digitized and enterprises can apply and receive funding in a matter of days—sometimes even mere hours.
This accelerated access to funds allows enterprises to act quickly on growth opportunities, manage cash flow, and address urgent financial needs promptly.
3. Broad Eligibility Criteria
While traditional funders focus solely on credit scores and financial history, alternative funders consider other factors, such as revenue and future prospects.
Brand new enterprises, those that have gone through a rough patch, and professionals with inconsistent earnings (like gig workers), deserve the opportunity to secure financing. By evaluating a broader range of criteria, alternative funders empower a wide range of SMEs to secure the funding they need.
4. Leveled Playing Field
Alternative funding plays a crucial role in promoting financial inclusion, as entrepreneurs from diverse backgrounds—many of whom have been excluded from traditional financing—find the funding they deserve.
Funding shouldn’t be an obstacle, but rather an opportunity for all SMEs to thrive, ultimately contributing to a more equitable business landscape.
Overview of Alternative Funding Options
We’ve gone over how alternative funding has positively impacted the SME community. Next, let’s get into some of the most popular SME funding options.
Merchant Cash Advances (MCAs)
Generally speaking, a merchant cash advance is a bulk payment given to an enterprise, with an agreement to repay via a predetermined percentage of future revenues.
This popular financing option for SMEs is characterized by short repayment periods—typically less than 24 months—and smaller, regular repayments, usually made on a daily or weekly basis.
The MCA approach differs from traditional bank loans, which often involve substantial monthly payments and extended repayment periods.
MCAs give SMEs the freedom to use funds for anything they need, from purchasing inventory to expanding.
Small Business Line of Credit
A line of credit provides SMEs with a quick financial solution without requiring collateral. This unsecured option is ideal for enterprises that don’t have enough assets to secure traditional loans.
Borrowers only pay interest on the amount they use, as opposed to the entire loan amount. This provides a reliable source of working capital for SMEs with fluctuating cash flow needs.
Equally important, this financing option can also help SMEs build financial credibility while offering lower interest rates compared to credit cards.
Term Loan
A term loan offers a fixed and predictable payment plan that fits into any SME’s budget.
Often providing lower interest rates than other financing options like credit cards, a term loan offers a solid plan for repayment—with little paperwork and quick approval processes.
Receiving a lump sum upfront and repaying it over a set period of time can save SMEs money and hassle in the long run.
With a term loan, merchants can plan for their expenses and keep finances organized with regular payments on a monthly, bi-weekly, or weekly basis.
Equipment Financing/Leasing
Especially in the early days of an enterprise, it can be daunting to invest in the equipment and technology needed for daily operations.
By financing or leasing, SMEs can avoid the hefty upfront costs of purchasing equipment outright—and instead enjoy predictable monthly payments that help with budget planning.
Furthermore, this type of alternative funding allows SMEs to upgrade their equipment as technology evolves, helping them to stay competitive in the market. And because it relies on the equipment itself as collateral versus personal credit or annual revenue, this enables lower rates and more application approvals.
The Impact of Technology on SME Funding
In today’s digital era, the advent of funding platforms has revolutionized SME funding.
They are transforming how funders support SMEs and improve their access to the capital they need. Both funders and SMEs benefit from a streamlined process that enhances efficiencies across the board.
Funders can enjoy:
- Cost savings and time efficiencies by automating and centralizing tasks.
- Reduced risk through real-time access to customer data, enabling smarter decision-making.
- Increased sales by using detailed analytics to drive deal closures and expand funding portfolios.
On the SME side, the advantages of a funding platform are just as compelling, offering:
- Faster access to funding by simplifying the application and tracking process.
- Visibility/transparency into the entire process, enabling borrowers to stay informed and engaged from their application all the way through disbursal of funds and beyond.
- More time to focus on growth by reducing the time spent on paperwork and streamlining the process of securing funding
In essence, funding platforms are reshaping the SME funding landscape by empowering SMEs to access capital more easily, while providing funders the insights needed to make more intelligent, data-backed decisions for the future.
Onyx IQ: Welcome to the SME Funding Revolution
As SMEs increasingly seek alternative funding solutions, it’s more important than ever for funders to stay on top of digital funding trends.
Onyx IQ is a funding platform designed to streamline and elevate the entire MCA funding process.
With prebuilt workflows for underwriting, customizable scorecards, real-time performance data and more, Onyx IQ offers an all-in-one, automated funding solution to empower merchant cash advance funders to optimize and scale their operations.
Ultimately, Onyx IQ helps you meet the growing demand for alternative funding while driving growth for your own business.
Book a free demo today and discover how Onyx IQ can revolutionize your funding process, streamline operations, and help you stay ahead in a rapidly changing industry.
