In years past, the vast majority of small businesses obtained financial capital through traditional bank loans. But since the 2008 recession, banks are more selective than ever about who they lend money to. According to a study from Harvard Business School, “Small-business loans made up nearly half of all bank loans in 1995, but that share had dropped to about a third by 2012.”
Luckily, there are several online lending options that small businesses can use to get the funding they need without having to jump through a bunch of hoops. But you first need to understand the basics of the process.
How Online Loans Differ from Traditional Bank Loans
It’s much easier to obtain an online loan than one from a traditional bank. Online lenders have far fewer government regulations to deal with and can examine a variety of different metrics such as your credit score, cash flow, and vendor payments.
Online loans are far more streamlined than going after a traditional bank loan. Everything is done online for a speedier application process, and you can get your money much quicker. There’s also more flexibility, and you can typically get loans that range anywhere between $5,000 and $250,000.
The main drawback is that you can expect to pay higher interest rates and heftier fees. That’s because online lenders tend to take a bigger risk than traditional banks, so they have to boost interest rates and fees to offset that risk. According to Value Penguin, “The Average Annual Interest Rate (AIR) for large national banks is only 2.24 percent to 4.77 percent, while the AIR for online lenders is 5.49 percent to 66.57 percent.”
When Online Lending Makes Sense
Here are some common reasons why you would want to explore online lending options:
- You’re a new startup (less than two years old)
- Your business didn’t qualify for a traditional bank loan
- You only need minimal funding (less than $100,000)
- You need money quickly
- You’re looking for flexibility with your financing
Common Types of Online Loans
Here are a few specific types of online lending options that may work for your business:
- Business line of credit – This is where you have funding available whenever you need it. You only accrue interest when you take money from your line of credit and only owe interest on what you take out.
- Term loans – These are similar to a traditional bank loan but come from an online lender. However, there’s more flexibility with “medium-term” loans and short-term loans.
- Equipment financing – This is a way to help you finance expensive business equipment such as machinery, vehicles, commercial kitchen appliances, etc.
- Invoice financing – If it takes time for your customers to pay, a lender will give you a cash advance to ensure you have proper cash flow.
- Business credit cards
- Merchant cash advance – This tends to be one of the more expensive options but can get you cash in a hurry.
Online lending may very well be a viable option for your small business. However, it’s important to do your research and know which type of loan is most suitable for your unique situation. For more information on specific lenders along with their annual percentage rates, check out this resource.