When people think of getting a business loan, they usually imagine a well-dressed small business owner sitting nervously across the table from a serious-looking bank officer. The loan officer is busy examining the entrepreneur’s loan application and a pile of other documents, his fingers just a few inches away from two large stamps — one that says APPROVED and another that says DENIED.
However, while bank loans are still one of the most popular funding options for many entrepreneurs, the lending landscape has changed in the past decade. A new breed of alternative lenders has cropped up, willing to provide business owners a different way of financing.
If you’ve ever considered borrowing money for your business, read on. This article discusses everything you need to know about getting small business loans online.
How to qualify for an online loan
Banks are incredibly strict when it comes to lending money, to the point that some people consider banks only willing to lend money to businesses that don’t need a loan at all.
If you have a low credit score, it will be close to impossible for your loan application to be approved. Similarly, if your business is below two years old or if you do not have any assets that you can use or are willing to use to back your loan, chances are, you are going to be declined.
In contrast, alternative lenders consider other factors when evaluating applications. Instead of focusing on the borrower’s credit score or length of time in business, for example, lenders will look at the company’s cash flow to judge the business’s health and the borrower’s creditworthiness.
Some lenders have additional requirements that are similar to those of traditional lenders but they tend to be less strict about them. Some require collateral or a personal guarantee so that they can get their money back in case you fail to repay the loan.
Others also have a required minimum yearly revenue or minimum time in business. The borrower hitting the minimum required revenue signals that the business makes enough money to make loan payments, while the business passing the minimum time in business means a lower risk that the company will fail before fully paying back the loan.
How long it takes to get a small business loan online
Banks ask for a ton of paperwork, which takes applicants a lot of time and effort to complete. These documents then need a long time for the bank to process and verify. It usually takes borrowers weeks just to fill out the application form and gather all the necessary papers. After submission, they will have to wait for a few months more to find out if their application is approved or denied.
Alternative lenders, meanwhile, leverage technology to receive and evaluate applications. They use Web-based tools to make the application process not just faster, but also more convenient for borrowers.
The application process is easy and straightforward and can be done online or over the phone, with no in-person meetings necessary. Instead of asking for a long list of documents, online lenders can just check the applicant’s transaction records and cash flow by connecting to their bank accounts Web site or their accounting program.
With this application process, the borrower’s eligibility can be determined within two hours or less. The loan application can be approved immediately after that and the money transferred to the borrower’s bank account within a few days.
How convenient it is to apply and how quick it is to get funded are two factors that are very important to many entrepreneurs looking for loans. In fact, in a 2016 survey of small entrepreneurs, the Electronic Transactions Association identified that these two factors are the top two reasons why businesses choose online lenders.
In addition, the ease of application and the speed of funding are also two reasons why some entrepreneurs choose to get a small business loan online even though they can qualify for a bank loan. Not all business owners can afford to wait for months or have the patience to prepare all the requirements needed by banks.
Short-term and long-term loans
Some online lenders offer short-term loans that have a repayment period of 3 to 24 months. These loans are ideal for immediate financing needs and short-term projects, such as buying inventory, accommodating seasonal demand, purchasing equipment, implementing marketing campaigns, and as general working capital.
Some lenders also offer longer-term business loans, with a repayment term of 1 to 5 years. These loans are better suited for long-term projects, such as expansions or major renovations of your business establishment.
If you need a small business loan that has a longer repayment period, you will have to get a traditional loan instead, such as a bank loan or SBA loan.
How much you can borrow
While most online lenders cannot lend businesses millions of dollars as traditional lenders can, the loan amounts they offer are high enough for the needs of most small businesses. Amounts can be as low as a few thousand dollars for short-term loans to as high as $500,000 for longer-term ones.
Some lenders do not lend money to businesses that belong to certain industries. The restricted industries differ from one lender to another, but some of the common ones are financial services, gambling, firearms, and adult entertainment.
How to apply for a small business loan online
As stated above, online lenders have fewer requirements. Nevertheless, take the time to check if you meet all the minimum requirements listed by the lenders before you submit your application. Do you have the minimum credit score, annual revenue or time in business?
Aside from your business qualifications, most lenders will also ask you for:
- Your business tax ID
- Your social security number
- Access to your business bank account or accounting software
- Business bank statements
- Business tax returns
Interest rates and fees
Compared to traditional loans offered by banks and credit unions, online loans have a higher interest rate, especially short-term loans that are available to borrowers who have bad credit or who have been in business for only a short time. The rates vary depending on the lender, repayment terms, and risk but are still reasonable compared to other options and may be lower than the rates you will get with credit card advances or merchant cash advances.
There may also be an origination fee, and possibly other fees too.
How to make payments
Different lenders have different repayment methods. Some require a monthly payment, similar to traditional loans, while some auto-deduct a fixed amount from your business bank account per day or week.
Note that your repayment schedule can affect your company’s cash flow so before choosing a lender, find out the repayment schedule and consider how it will affect the operations of your business.
Nowadays, small business owners who need additional capital do not have to take the long and arduous road toward bank loan approval or put up with getting no funding at all. Thanks to the rise of alternative lenders online, borrowing money to grow your business can be done faster and easier.
The downsides are that you will have a higher interest rate and a possibly shorter repayment period. Whether those trade-offs are worth it is entirely up to you to decide, so carefully consider your options before signing any agreement.