When small and medium-sized enterprises (SMEs) need operational capital, their first instinct is often to turn to traditional banks and credit unions.
The problem? Many SMEs struggle to meet banks’ strict eligibility requirements—making it difficult, if not impossible, for them to obtain funding.
The solution lies in alternative funding.
Unlike banks, alternative funders are specifically focused on supporting growing enterprises who may not otherwise qualify for financing.
In this article, we’ll explore the world of alternative funding, including its benefits, the different types of products alternative funders offer, the players involved, and how its flexible approach compares to conventional financing methods.
The Benefits of Alternative Funding
Put simply, alternative funding presents a whole host of financing opportunities for SMEs who have been vastly underserved in the past.
That’s because alternative funders design their processes and products with SMEs in mind, based on a solid understanding of their limitations, needs, and preferences.
As a result, SME owners who turn to alternative funding methods tend to reap the following benefits:
Quicker Turnaround Times
The traditional process of securing financing may involve filling out hours of paperwork and attending an in-person meeting at a bank, followed by waiting days or even weeks to be approved.
But with alternative funding, SMEs can usually access capital in just a few hours by exchanging information via a digital funding platform.
Easier Access to Funding
To access funding through a bank or credit union, SMEs often need a strong business credit history and hundreds of thousands of dollars in annual revenue.
Unfortunately, these rules disproportionately and adversely affect those trying to get ahead. And as a result, loan approval rates for SMEs have remained relatively low, consistently hovering around 50% in recent years.
Thankfully, alternative funding levels the playing field by offering financing solutions with fewer barriers to entry.
More Flexible Terms
Traditional loans are often accompanied by stipulations about how the money can be used. Conversely, alternative funders rarely have such restrictions.
Moreover, SMEs can get the exact financing they need, even in amounts smaller than what traditional institutions might offer.
With a variety of funding options and flexible terms built with SMEs in mind, smaller enterprises are more likely to receive financing that aligns with their specific needs.
A Typical Alternative Funding Workflow
So how does alternative funding actually work? Although some aspects of the process are similar to that of traditional institutions, the overall experience is quite different.
Many large banks rely on highly manual processes within their funding workflow, which leads to longer wait times to obtain capital.
Alternative funding, on the other hand, usually offers a more streamlined and accelerated financing process. That’s because practically everything—from applications to underwriting to funds distribution and more—can be done using automated funding technology.
Generally, the process for accessing alternative financing can be broken down into the following five steps:
- SME owner requests alternative funding by submitting an online application.
- Alternative funder evaluates the SME’s risk profile and creditworthiness, and approves or declines the application (often within a matter of hours).
- Funder sends financing terms to the SME, arranges signing of paperwork, and distributes capital—all via a digital funding platform.
- Funder services the SME owner throughout the duration of the contract, coordinating administrative tasks, including payment scheduling.
- SME owner repays the amount, completing the terms of the financing agreement.
As alternative funding is closely related to technology, the process is smooth and efficient, both for the SME owner and the funder.
Alternative Funding Stakeholders
Alternative funders don’t generally answer to the same stakeholders as traditional banking institutions do.
That’s because, especially due to the rise of automated funding platforms, there are a variety of alternative financing business models.
For example, some alternative funders may not actually originate the financing but instead partner with others. Meanwhile, other funders may work with only one financing supplier.
Ultimately, there are multiple parties with a vested interest in alternative funding, including:
- Investors: Perhaps the most common stakeholder, investors are interested in the financial success of alternative funding businesses and require regular, accurate, and timely detailed information on financial performance.
- Employees: Staff members like underwriters and compliance officers carry out the day-to-day operations of alternative funding businesses, and have personal and financial interests in the company.
- Creditors: As the ones supplying the funds, creditors want their alternative funding partners to be successful, ensuring they will be paid back within specified terms.
- ISOs (independent sales organizations): Similar in many ways to MCA brokers, ISOs are essentially sales representatives who serve as the “middlepeople” to facilitate the financing process between SME owners and alternative funders.
- Syndicators: Syndication is a more complex process where multiple funders can participate in financing by contributing their own capital, spreading out risk as well as financial opportunity, while offering a high degree of flexibility for the SME owner.
By working in sync, these stakeholders help ensure alternative funding continues to be a well-oiled machine, capable of supporting SMEs across industries, sizes, and growth stages.
Common Types of Alternative Funding
Within the alternative financing ecosystem, there is a wide range of funding options for small and medium-sized enterprises. Below, we outline some of the most popular choices available.
Note that, while banks and credit unions may offer similar products, their products often come with stricter eligibility requirements and less flexible terms versus going through an alternative funder.
Term Loans
A term loan is a lump sum of money featuring a set timeline (also known as the loan term) for repayment, a fixed number of payments, and a fixed or variable interest rate.
These classic SME loans are popular because they can be used for almost any business purpose, from payroll to acquiring a new location. Plus, repayment periods are flexible, ranging anywhere from a few months to more than a decade.
Business Line of Credit
A business line of credit is a good option for companies with significant seasonal fluctuation, short-term expenses, or who frequently need additional cash flow.
With this type of financing, SME owners have the ability to access funds only when needed. Rather than taking a lump sum like a term loan would provide, the merchant makes withdrawals against their account using a business checking account, credit card or a mobile app, as many times as they want, up to the account’s available credit limit.
The line of credit is then paid back with interest, resetting the loan amount back to its original value.
Equipment Loans
As its name suggests, an equipment loan is specifically used for the purpose of buying, upgrading, or improving business equipment or machinery.
The equipment itself serves as collateral, with alternative funders often financing up to 100% of the costs.
Invoice Financing/Receivables Financing
With this convenient option, an SME can receive advanced funds based on their outstanding invoices. More specifically, an alternative funder will offer a percentage of the value of those invoices, with the remainder paid when the merchant’s customers pay (including fees and interest).
This financing product can help boost growth and bridge the gap for SMEs who have customers who take a long time to pay. For the funder, no additional collateral is required and assessing risk is a more straightforward process.
Merchant Cash Advances (MCAs)
With this financing method, the alternative funder offers a bulk amount that the SME owner pays back via a percentage of their future revenues.
Funds are repaid on a relatively short timeline, often on a daily or weekly basis, and the funder charges a portion of sales as well.
Ultimately, merchant cash advances offer a quick and relatively easy way to secure funding for anything they need, providing an alternative financing option for enterprises with less-than-stellar credit or urgent cash flow needs.
Traditional Funding vs. Alternative Funding
Whether it’s faster approvals, more flexible terms, or broader acceptance criteria, alternative funders continue to fill critical gaps left by banks and credit unions.
The table below highlights the key differences between traditional and alternative financing, illustrating why more SMEs are turning to these modern financing solutions:
| Traditional Funders | Alternative Funders | |
| Eligibility requirements | Strict, ever-tightening requirements requiring strong credit history, high annual revenues, etc. | Flexible criteria that considers broader data sources beyond credit scores. |
| Approval rates | Generally low approvals for newer or smaller enterprises. | Generally higher rates, as the eligibility requirements are already aligned with the way SMEs operate. |
| Application process | Paperwork-intensive, may require in-person meetings. | Fast, fully online applications that can be completed within minutes, with minimal paperwork. |
| Speed of funding | Can take weeks and even months for fund disbursement. | Approvals given within hours, with funding disbursed within 24-72 hours. |
| Funding amounts | Traditional funders prefer to service amounts of over $250,000. | Alternative funders can accommodate smaller amounts for SMEs. |
| Repayment terms | Strict, fixed terms with little flexibility in terms of repayment schedules. | Products are deliberately built to be flexible and dynamic (like MCAs), so repayments can be aligned to future revenues. |
| Use of funds | Often restricted to specific purposes. | Funds can typically be used as the SME sees fit. |
| Customer support | Limited, often impersonal, and manual. | More responsive, tech-enabled, often with dedicated and personalized support. |
Of course, all that alternative funding offers to SMEs would be impossible without the advanced digital infrastructure that powers it.
Importance of Technology in Alternative Funding
For traditional funders, fully replacing their decades-old legacy systems is expensive, risky, and time-consuming.
Rather than completely overhaul their systems, many big banks and credit unions instead resort to layering new software atop old frameworks, creating a fragile and overly complex tech stack that limits their ability to adapt quickly.
Ultimately, to properly service customer segments like SMEs, traditional financial institutions would need to rethink the very systems they’re built on.
Conversely, this is where alternative funders really shine. Having built their operations from the ground up, modern technology is always at the core of alternative financing, allowing for a much more agile and responsive model to SMEs’ needs.
That’s because digital funding platforms empower alternative funders to:
- Automate underwriting and approvals, enabling faster, more accurate funding decisions with fewer delays.
- Leverage real-time data and analytics, driving smarter, more informed financing decisions across diverse merchant profiles.
- Deliver a fully digital and personalized customer experience, giving SMEs a seamless, user-friendly journey that’s fast, transparent, and ever-accessible.
- Boost efficiency and scalability by reducing manual tasks and errors, streamlining compliance, and supporting growth without added overhead.
- Enhance transparency and reporting for stakeholders, including investors, ISOs, employees and more, with tailored insights and robust compliance visibility.
In other words? When it comes to financing SMEs, technology isn’t just a nice-to-have: It’s the driving force behind alternative funding, giving modern funders a distinct edge over traditional institutions.
Onyx IQ: Revolutionizing MCA Funding for Modern SMEs
Alternative funding isn’t just a way around traditional funding roadblocks—it represents a complete reimagination of how SMEs access capital.
As mentioned earlier, merchant cash advance (MCA) funders represent one of the most dynamic corners of the alternative financing world, with fast, flexible access to capital for SMEs that traditional lenders often overlook.
Using an advanced digital funding platform to automate decisioning, track performance in real-time, and more, MCA funders can offer a level of service and speed that legacy institutions simply cannot match.
Developed for MCA funders by MCA funders, the all-in-one automated funding Onyx IQ platform provides the tools to supercharge and streamline operations from end to end. Book a demo today and discover how Onyx IQ helps modern MCA funders deliver alternative financing that’s fast, frictionless, and designed to meet the real-world needs of today’s SMEs.
