by Meredith Wood
The recent wave of alternative and online business loans has opened a new frontier of financing opportunities for small business owners. As little as 10 years ago, if you were searching for an online business loan, you wouldn’t find much.
Today, up to 80 percent of small business owners are turned down by big banks, putting a crimp on their cash flow needs—and that’s after going through the tedious and tiring business loan application. For business owners who have been waiting what feels like forever for an answer, which is often times “no,” online business loans offer new and often better choices.
Historically, traditional banks have not had a soft spot for small businesses. They find that small business lending is just as extensive a process as bigger, more guaranteed deals—but with a smaller payoff. After the 2008 recession, traditional banks’ already tight lending standards tightened even more. Unfortunately, that means fewer and fewer small business owners are able to qualify for a loan from a traditional bank.
But the rise of alternative and online business loans has changed the landscape of opportunities for small business owners. Since 2007, online lenders have joined the lending marketplace to open up credit for small businesses that don’t qualify for a bank loan.
Online business loans have several distinctions from traditional bank loans.
1. You can qualify in 24 hours with far less paper pushing
Unlike banking institutions, alternative lenders providing online business loans don’t have to work with as much government regulation during their loan approval process.
You will need far less paperwork for your application, so you’ll invest far less time gathering a pile of documents, and the lender will save processing time by having less to go through. Online business loans leverage technology to speed up information processing time.
2. You can borrow appropriate amounts
Most traditional banks won’t consider making a loan for less than $250,000. This can be useless for a small business that just needs $60,000 to buy the next big piece of equipment or hire their next team member—or $5,000 for a machine or some seasonal help.
Online lenders fund loans at amounts needed by small businesses. They can easily process loans between $5,000 and $250,000. In general, online business loans provide more flexibility in loan products and terms for small business owners.
That means you won’t be restricted to only the most conventional borrowing options out there. Instead, you’ll have access to a variety of online business loans for many different purposes at appropriate amounts for your business.
3. Convenience comes at a cost
Compared to small business owners, big business counterparts typically have more experience, resources, time, and human capital to weather the lengthy process required by traditional banks. Big businesses are also a more viable customer for a bank because the size of their lending needs, and all things being equal, for the same amount of work, the bank makes more on a larger loan for the same amount of work.
Alternative and online lenders recognize that. With that in mind, they have developed lending programs that provide small businesses with what they need, and cut out what they don’t. Alternative and online lenders have a willingness for the higher risk that comes with working with small businesses. And that customization, convenience, and risk, like all things in business and in life, come at a cost. In part, online loans are more expensive in part because they’re so accessible.
Alternative lenders expand access to credit for small businesses, but to do so, they take on riskier borrowers. Unfortunately, if you have a less-than-stellar credit score or you’re just starting out, funding your small business is viewed a risky investment. To minimize their losses, online lenders charge high-interest rates and fees.
Not all online business loans will be expensive, though. If you have a great credit score, you might find a 6-15 percent SBA loan.
On the other end of the spectrum, you’ll find APRs in the higher double digits with loan products like merchant cash advances.
4. Your personal credit is scrutinized more
According to a recent Wall Street Journal article, traditional bank lending tends to serve companies that have been running for 10 years or more. Younger businesses, including startups, find it very difficult to even qualify for a traditional bank small business loan.
If you are a new business with no history of financial statements and revenue documentation, you are likely to get the “high risk” label, simply because you don’t have a business credit history yet.
A growing number of alternative lenders now offer startup loans that ask for minimal, if any, business credit history to qualify. In these cases, your personal credit history takes the center stage. You can expect to pay a higher rate and have your personal credit closely scrutinized. Startups and fledgling businesses may qualify for working capital loans, equipment loans, lines of credit, professional practice loans, and franchise startup loans through alternative lenders.
Taking on debt at any cost is an individual decision, and it’s up to the small business owner to determine if it’s worth it. As the market for such loans grows, so will the options and amount of favorable terms for the small business.
Meredith Wood is the editor-in-chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. She is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more.