Alternative Lending

Alternative lending is credit that comes from outside the traditional bank and credit union system. It's a broad label, not a legal category. It covers several kinds of non-bank lenders:

• Community lenders, such as Community Development Financial Institutions (CDFIs), loan funds and microlenders that serve people and places banks underserve.
• Online lenders, often called fintech lenders, that take applications and make decisions online.
• Private and hard money lenders that make short-term loans backed mainly by real estate.
• Revenue-based funders, such as merchant cash advance (MCA) providers and invoice factoring companies. An MCA is usually structured as a purchase of future sales, not a loan.
• Private credit funds that lend directly to mid-sized companies.

Because these lenders don't take deposits, they need other money to lend. They borrow from banks through credit lines, raise money from investors, sell loans, or use grants and low-cost capital from foundations and government programs.

Why it matters for lenders

Alternative lenders fill gaps. They often approve borrowers with short histories, thin credit or uneven income, and many decide in days rather than weeks. Many lean on cash flow underwriting, which looks at real bank activity instead of only tax returns and credit scores.

Demand has grown. The Federal Reserve's 2026 report on its Small Business Credit Survey found that the share of small business applicants seeking financing from online lenders rose from 17% in the 2020 survey to 29% in the 2025 survey. The same report found those applicants were less satisfied than bank applicants, most often citing high rates and tough repayment terms.

That gap shapes regulation. In the US, non-bank lenders aren't examined like banks, but they still face rules. Many states require a lending license. A growing number require commercial financing disclosures that show the cost of business financing. Fair lending law applies to all creditors. The Federal Trade Commission's Safeguards Rule requires many non-bank financial firms to protect customer data.

How it works in practice

An online small business lender funds its loans with a bank credit line. Its pitch to borrowers is speed: apply on Tuesday, get money on Thursday.

Behind that promise sits a lot of tracking. Each funded loan must meet the bank's rules on size, industry and borrower credit before it can be pledged to the credit line. Each month, the lender reports loan performance to the bank. Deals in disclosure states need the right state form.

In spreadsheets, someone rebuilds the bank report every month and hopes the numbers match the payment records. When the loan, its payments and its funding source sit in one system, the report comes from the same data the servicing team uses.