Alternative Lending: Revenue-Based Financing, MCAs, and Online Lenders

Why Alternative Lending Exists

Traditional banks approve roughly 20% to 30% of small business loan applications. That leaves millions of business owners who need capital but cannot meet bank requirements. Alternative lenders fill that gap with faster approvals, simpler applications, and more flexible qualification criteria. The trade-off is cost: alternative financing almost always costs more than a bank loan.

Revenue-Based Financing

Revenue-based financing (RBF) gives you a lump sum in exchange for a fixed percentage of your future monthly revenue until you repay the total amount plus a fee. There are no fixed monthly payments. When revenue is high, you pay more. When revenue dips, you pay less.

How It Works

You receive $100,000. The repayment cap is $130,000 (a 1.3x multiple). You agree to pay 8% of monthly revenue until you hit $130,000. If you have a great month at $80,000 in revenue, you pay $6,400. If you have a slow month at $40,000, you pay $3,200.

Who It Works For

• Businesses with consistent monthly revenue of at least $10,000 to $15,000
• Companies that need growth capital but do not want to give up equity
• Seasonal businesses that need payment flexibility

What to Watch Out For

• The effective annual interest rate can be 20% to 40% or higher when you calculate it based on how quickly you repay
• Some RBF contracts have daily or weekly payment requirements, not monthly
• Read the contract carefully to understand what happens if your revenue drops significantly

Merchant Cash Advances (MCAs)

A merchant cash advance is not technically a loan. It is a purchase of your future receivables. The MCA company gives you a lump sum and then takes a fixed percentage of your daily credit card or debit card sales until they collect the full repayment amount.

How It Works

You receive $50,000. The factor rate is 1.4, so you owe $70,000. The MCA company takes 15% of your daily card sales. On a day when you process $3,000 in card sales, they take $450. This continues every business day until they have collected $70,000.

The True Cost of MCAs

This is where business owners get burned. A factor rate of 1.4 sounds like a 40% fee. But because the repayment happens in 4 to 12 months, the annualized cost often exceeds 60% to 150% APR. Some MCAs cost even more.

When MCAs Make Sense (Rarely)

MCAs should be a last resort. They can make sense when:

• You have a short-term, high-return opportunity that will generate enough profit to cover the cost
• You have been denied everywhere else and need emergency working capital
• You can repay within 60 to 90 days, minimizing the total cost

When MCAs Are Dangerous

• When you stack multiple MCAs (taking a second MCA to pay off the first)
• When the daily payments strain your cash flow to the breaking point
• When you use MCA money for expenses that do not generate additional revenue

Online Lenders

Online lenders like those operating through fintech platforms offer term loans and lines of credit with faster approvals than banks but at higher interest rates. They use technology to underwrite loans based on your bank account data, accounting software, and real-time business performance.

Typical Terms

• Loan amounts: $5,000 to $500,000
• Interest rates: 8% to 35% APR (varies widely based on your profile)
• Repayment terms: 3 months to 5 years
• Approval time: Hours to a few days
• Funding time: 1 to 3 business days after approval

Advantages of Online Lenders

• Speed: Apply today, get funded this week
• Lower credit requirements: Many online lenders approve borrowers with credit scores as low as 600
• Less documentation: Some only require bank statements and a simple application
• Technology integration: Many connect directly to your accounting and banking software for faster underwriting

Disadvantages

• Higher interest rates than banks or SBA loans
• Shorter repayment terms mean higher monthly payments
• Some online lenders charge origination fees of 1% to 5%
• Less regulatory oversight than traditional banks in some cases

How to Compare Alternative Lending Options

When evaluating any alternative financing offer, calculate these numbers:

1. Total cost of capital: How much will you repay in total, minus the amount you received? That is the true cost.
2. Annualized percentage rate (APR): Convert the total cost to an annual rate so you can compare across different products.
3. Payment-to-revenue ratio: What percentage of your monthly revenue goes to debt payments? Keep this below 15% to 20% to maintain healthy cash flow.
4. Cost per dollar borrowed: Divide the total fees by the loan amount. If you are paying more than $0.20 per dollar borrowed on a short-term product, proceed with extreme caution.

The Alternative Lending Decision Framework

Ask yourself these questions in order:

1. Can I qualify for a bank loan or SBA loan? If yes, go that route.
2. Do I have at least six months of consistent revenue? If yes, revenue-based financing may work.
3. Do I need money in days, not weeks? Online lenders offer the best balance of speed and cost.
4. Is a merchant cash advance my only option? If so, borrow the absolute minimum, have a repayment plan, and never stack MCAs.

Alternative lending is a tool. Like any tool, it can build something or it can cause damage. The difference is understanding the true cost and having a clear plan for how the capital will generate enough return to justify that cost.