Alternatives to a PPP Loan for Small Business Owners

To offset the economic impact of the coronavirus, the Paycheck Protection Program (PPP) provided eligible small business owners two rounds of fully or partially forgivable funding. Although immensely helpful, not every small business owner was able to qualify for the program.

If you did not secure a PPP loan in 2021, don’t panic! You may have other financing options. Here are some to consider:

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SBA 7(a) Loan

SBA loans have low rates, long terms, and  low monthly payments. It’s a government-guaranteed small business loan with a long-term and a low-interest rate.

The most common misunderstanding about these loans is that the SBA government organization lends money directly to small businesses. However, the Agency typically does not make direct loans. The SBA provides a guarantee on the loan, promising to reimburse the bank for a certain percentage of your loan if you default on that loan. This guarantee helps to lower the risks to banks and other lenders, encouraging them to offer these loans to more American small businesses. Many banks and other financial institutions offer SBA loans, but their process, requirements, and fees can vary. For in-depth information about the popular SBA 7(a) loan program, visit the SmartBiz Small Business blog and review our comprehensive article:  What is an SBA Loan?

Advantages of SBA 7(a) loans

An SBA 7(a) loan has several advantages compared to other options including:

  • Low interest rates
  • Long terms
  • Very low monthly payments
  • Available for many uses
  • Can help build business credit
  • No prepayment penalty

Requirements to apply for an SBA 7(a) loan 

Lenders and loan programs have unique eligibility requirements for an SBA loan. For example, some lenders may require a business plan while others do not (SmartBiz Loans does not require a business plan). Requirements for an SBA loan facilitated by SmartBiz include:

  • Time in business must be above 2 years
  • Business owner’s personal credit score must be above 650
  • The business must be U.S. based and owned by US citizen or Lawful Permanent Resident who is at least 21-years old
  • No outstanding tax liens
  • No bankruptcies or foreclosures in the past 3 years
  • No recent charge-offs or settlements
  • Current on government-related loans

How to apply for an SBA 7(a) loan:

Step 1: Check your eligibility. Before you  begin your application, make sure your business is eligible. Visit the  SBA website  for a list of eligible businesses. You must also meet the requirements listed above.

Step 2: Review requirements and gather paperwork. Typically, the more organized you are, the swifter the application process will move. To better understand which  documents are required for an SBA loan, visit the SmartBiz Blog:  How to Get an SBA Loan: Documents You Need.

Step 3: Choose a lender. Although  SmartBiz Loans is not a lender, we work with multiple banks to match you with the lender most likely to fund. This process  may help you save time instead of  going from bank to bank.

How can proceeds from an SBA 7(a) loan be used?

An  SBA 7(a) loan can be used for a variety of purposes, including:

  • Working Capital –  Purchase equipment, increase inventory, add marketing programs, use for operating expenses or to hire additional staff.
  • Debt Consolidation Loans –  Refinance merchant cash advances, short-term business loans, high interest business loans, daily or weekly payment loans, or business credit cards.
  • Commercial Real Estate –  Refinance an existing commercial real estate mortgage, buy an office building or other owner-occupied commercial space.

SBA Microloans

The Microloan Program is for very small businesses, including start-ups and provides loans of up to $50,000 (although SmartBiz Loans does not offer microloans, we do offer SBA 7(a) loans from $30,000).

Microloan Amounts

Borrowers can apply for up to $50,000, with the average loan size funded by the SBA just $14,215 in 2016.

Microloan Interest Rates

Microloans have interest rates between 8%-13% and must be fixed rate and fixed term with regularly scheduled payments.


Generally, intermediaries require some type of collateral as well as the personal guarantee of the business owner.


Loan repayment terms vary according to several factors, including:

  • Loan amount
  • Planned use of funds
  • Requirements determined by the intermediary lender
  • Needs of the small business borrower
  • The maximum repayment term allowed for an SBA microloan is six years

Use of Proceeds

Proceeds from an SBA microloan can be used for most business expenses, such as:

  • Working capital
  • Inventory or supplies
  • Furniture or fixtures
  • Machinery or equipment

You cannot use an SBA microloan to refinance existing debt or to purchase real estate. If you need to refinance debt or purchase real estate, you should consider other SBA loan programs, such as a 7(a) commercial real estate loan.

Who Are Microloans For?

These small loans help small business owners who need less than $50,000 to strengthen and grow their business.

Microloan requirements

Check with your individual lender as requirements can vary, but, in general:

  • Credit score of at least 640 is required
  • The business owner will need to either put up collateral or sign a personal guarantee

Short-term Business Term Loan

Short-term business loans are a type of term loan. A one-time sum of proceeds is paid out to the borrower up front. The borrower must repay the full sum plus interest and any fees over the term, typically ranging from a few months to a few years.

Banks in the SmartBiz network offer Bank Term loans with 2–5-year repayment terms. To learn more, visit the  SmartBiz website.

On the other hand,  long-term loans are a type of term loan that typically have a life of at least 10 years, paid down in monthly installments. When the repayment terms are long, the associated monthly payments are smaller since the total owed is broken down into smaller  segments. These types of loans are useful when you’re planning for steady growth over time, instead of addressing immediate needs.

Short-term business loan requirements

Although less paperwork may be required to apply for a short-term loan, there are still documents you’ll need to produce.  Below is a list of information typically required (check with your lender before you start the process and  enlist the help of a financial professional if you need guidance):

  • Business tax ID number
  • Your personal credit scores
  • Your business credit profile
  • Business bank account information
  • 3 months of bank statements
  • Annual revenues
  • Proof of time in business

Advantages of short-term loans

Short-term loans can be an excellent source of capital for a business. Advantages include:

  • High credit scores typically not required
  • Limited paperwork required to complete application
  • Process is typically faster than longer term loans
  • Proceeds from a short-term loan can be used in a variety of ways
  • Easier to qualify for
  • Shorter time for incurring interest, as short-term loans need to be paid off within about a year, there are lower total interest payments

Short-term loan disadvantages

  • The interest rates for short-term loans can be relatively high compared to other loan products
  • Short-term daily payment loans may do more harm than good if revenue fluctuates
  • They typically provide only smaller loan amounts
  • If you need to continually refinance the loan, you could get stuck in a “debt cycle” accumulating more and more interest and fees

Business Line of Credit

A small business line of credit (LOC) is a financing option that offers access to capital up to a maximum amount. This option is known for its flexibility because it allows borrowers to take out the amounts they need at any time, with interest charged only on individual withdrawals.

Because of this unique arrangement, a line of credit is a type of revolving account. Traditional term loans, whether  backed by the SBA  or  not, have a preset sum deposited upfront that’s repaid through equal payments over time. Lines of credit on the other hand, create a “revolving” cycle where borrowers can withdraw funds up to a set maximum at any time, repay that amount, and withdraw it again.

Available Options

Typically, lines of credit can be either secured or unsecured. In most cases, they are unsecured loans. This means that the lender doesn’t need any collateral to back the account.

If you’re looking for a line of credit, you’ll commonly find that they’re offered by local banks for smaller amounts than term loans. Other sources to look for funds include alternative lenders available through online platforms.

Qualifying for a Line of Credit

Depending on your preferred lender and the type of LOC you’re applying for, you’ll find varying eligibility requirements. Most traditional bank lenders require good credit, strong revenue, and several years in business. They also usually require applicants to provide financial documentation like tax returns, profit-and-loss statements, and balance sheets to demonstrate their business’s financial health.

On the other hand, alternative lenders may have looser eligibility requirements and lower credit minimums, but they’re more likely to charge higher interest rates and fees.

Business Credit Card

Small business credit cards may help fund small to midsize businesses. In a report from the American Bankers Association, small businesses with business credit cards had more assets, loans, revenue, and employees on average.

Ask yourself what’s important to your business when searching for a card. Many small business owners agree that discounts and rewards rank high on their priorities for a credit card. Some cards help cut costs and earn money, which improves your bottom line. If you use a business credit card with discipline, these cards will send positive card activity to the business credit reporting bureaus. As an extra result, your business’s credit generally improves. With good business credit, you’re likely to get approval for a favorable SBA loan.

Invoice Factoring

Technically, invoice factoring is not a loan. Business owners sell invoices at a discount to a factoring company in exchange for a lump sum of cash. The factoring company then owns the invoices and gets paid when it collects from customers, typically in 30 to 90 days.

Invoice factoring pros

Fast cash: Invoice factoring can provide immediate working capital to help cover a funding gap caused by slow-paying customers.

Improved cash flow: You can keep loyal customers on longer payment terms but still improve your cash flow to help you grow your business.

Easier approval: Invoice factoring provides financing to companies that might not be able to get capital from other sources, such as a traditional bank, because of a lack of collateral, poor personal credit, or a limited operating history. Typically, factoring companies are concerned about the value of the invoices you're looking to factor and the creditworthiness of your customers.

No collateral required: Invoice factoring is unsecured financing, which means it doesn't require collateral — an asset such as real estate or inventory that the lender can seize if you fail to pay.

Invoice factoring cons

High cost: The service can be expensive. You should also be aware of hidden fees, such as application fees, processing fees for each invoice you finance, credit check fees or late fees if your client is past due on a payment. Late payments can trigger an increase in your annual percentage rate, the annual cost of borrowing money with all fees and interest included.

Not for every business: Invoice factoring is best for businesses that work with other businesses because transactions involve invoices. So, businesses that sell or work directly with consumers won't qualify for this option.

Loss of direct control: Because the invoice factoring company may collect on the invoices directly, you need to make sure it's ethical and fair when dealing with your customers.

Customers’ bad credit or weak finances could derail your financing: The factoring company may need to verify the creditworthiness of your customers. If the customers have a history of late or missed payments, or if the business has weak revenue, you may not be approved for the financing. The factoring company expects to get paid back, just like other types of lenders.

No guarantee of collection: There’s no certainty the invoice factoring company will successfully collect on your unpaid invoices. If it's a recourse factor, the factoring company may require you to buy back the unpaid invoice or replace it with one of equal or greater value.

Merchant Cash Advance

If you sign on with a merchant cash advance company, they will provide funds to your business in exchange for a percentage of the daily credit card income. A processor clears and settles the credit card payment, drawn from customers' debit and credit-card purchases daily, until the obligation has been met. Most providers form partnerships with payment processors and then take a fixed or variable percentage of future credit card sales.

How merchant cash advances work

An MCA is not a loan in the traditional sense. If you take out an MCA, a financing company advances cash to you in a lump sum. They then take a percentage of your daily credit card and debit card sales, on top of charging a fee. An example from Wikipedia® outlines a sample transaction:

A business sells $25,000 of a portion of its future credit card sales for an immediate $20,000 lump sum payment from a finance company. The finance company then collects its portion (generally 15-35%) from every credit card and/or debit card sale until the entire $25,000 is collected.

The merchant should carefully review any MCA agreement (and other loan products) with an attorney or another financial professional to ensure the merchant understands how the agreement works and how the MCA product differs from a business loan.

Merchant cash advance application process

Getting an MCA can be easier than other types of funding to apply for with a fast online process. MCA companies review your credit card processing statements to determine if you have enough business volume. Some MCA companies ask for credit scores and bank statements as well, whereas others don’t require this.

Applications for an MCA are typically completed online, and you might be able to get approved the same day you apply.

MCA factors to consider

Here are some details to consider when weighing the pros and cons of an MCA:

Factor Rate: This is the total cost of the money you’re advanced. You’ll need to pay back the original sum you receive plus any additional costs.

Holdback Percentage: If you have a high holdback percentage, the MCA provider generally takes more out of your daily credit card totals.

Additional Fees: You might be responsible for setup fees or advance fees that can equal 5% or more. Make sure you understand these fees before signing up, so you won’t be  surprised when collecting funds.

The bottom line on small business funding

The economic new normal means small business owners will need to adjust their business plan, protect their credit scores, and pivot to adapt. Low-cost funding can help you rebuild your business and expand in the post-pandemic world. Keep an eye on the SmartBiz Loans Blog for Small Business Owners for topical articles on business ownership.

WHAT YOU NEED TO KNOW:  The SmartBiz ® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.