Bank Loan vs Online Loan: Pros & Cons
With the unstoppable march of the Internet, online lending has grabbed a large chunk of the pie that both conventional banks and regular financial institutions dominated till recently. It is seen that currently, a majority of short-term, consumer-lending happens online.
The Wall Street Journal states that internet- based lending has doubled over the last 17 years. For instance, in 2014, online lenders gave out nearly $7 billion in term loans to borrowers. However, many business owners are still prone to getting their funding the old-fashioned way. This calls for looking carefully at the pros and cons of both offline and online lending and examining their future.
Conventional Loans vs. Online Lending: An Introduction
Most owners of small and medium enterprises do not usually care about the volume of business that a conventional or online lender does. Their prime concern is which funding source will offer them ready access to funds in a transparent manner and at reasonable terms and rates.
Moreover, for those companies that are yet to establish their credit worthiness, quick responses, convenience and prompt approvals from lenders matter most. Moreover, since comparative rates of interest are readily available online, a small business owner will always plump for a lender who gives him the best deal. Here, it becomes immaterial whether the lender is a traditional banker or a state-of-the-art technical online platform.
Pros and Cons of Conventional Lenders
Those business owners with strong credit scores often find that conventional banks offer them the best terms and the lowest rates. However, they need to wait for a few weeks for their application to be approved and to actually see the funds drifting into their bank accounts.
The US Small Business Administration offers some programs to back loans partially. Those organizations that qualify for such programs usually enjoy a higher rate of success in getting their loan applications approved and on terms more favorable to them.
However, most programs entertain those businesses only that have established track records, making them inaccessible to all.
Typically, any company that produces appropriate documentation as proof of solid credit, demonstrates a steady track record of success for a couple of years, and has the owner’s equity tied in, qualifies for such programs. Typically, a bank will accept a personal credit score between 700 and 800 and readily offer excellent rates and loan terms to those borrowers who meet this standard.
On the flip side, startups, companies belonging to certain high risk industries as also businesses that are yet to establish their creditworthiness may struggle to qualify either with the SBA or with a traditional bank. Even though some progressive programs are currently operational to cater to startups and companies requiring faster loan processing, these not only limit the loan size but may take a considerable amount of time to process and move to the borrower’s account.
Pros and Cons of Online Lenders
The moot question that now arises is: Can loans offered by online lenders be a suitable alternative to conventional business financing? To begin with, the modus operandi of online loan platforms varies. While some give out loans from institutions, others match individual investors and borrowers.
The factor common to all online platforms is that they are all reliant on a financial technology, called fintech now, to test which applicants qualify and to subsequently provide funding. This technology has enabled these companies to operate extremely efficiently and to offer more customized and flexible solutions than conventional loaning sources.
For instance, online lenders usually approve loans based mainly on proven legitimacy and just not the company’s credit score.
This works well with many businesses which are struggling with cash flow or require funding for expansion or to explore new opportunities as online lenders tend to act more quickly. The applicant applies online and watches his loan application progress from a mere application to actual funding within days. Thus, speed here is the unique selling point of online platforms.
With the existence of online lines of credit, when a business needs financing, it doesn’t need to go through the whole application process again. This particular flexibility allows the prospective borrower to pay fees on the money he actually receives with an assurance that he has access to more fund later. These lines of credit lines could range from anything between a few thousand dollars to $100,000 even. One can simply access this credit line by way of a request and shows up in the borrower’s account by the following day.
The most well-known online lenders come with some very transparent terms and fees. This enables borrowers to know beforehand how much they have to repay and when. However, such fees are usually dependent on how the lender assesses the borrower’s overall creditworthiness.
Recently some online lenders have been accused of charging exorbitantly high fees. This has been largely due to the fact that these platforms usually entertain borrowers whom conventional lenders would shun as high risk, making this flexibility skew averages.
Which Wins Then?
After having studied the pros and cons of both conventional and online lenders, it may be said that both have a unique standing in their own space. Any business that has the time, equity, documentation, and credit score to get a conventional bank loan benefits from lower SBA loan rates and better payment terms. On the other hand, small, startup and online companies with weak or no credit and which require urgent funding will tend to tilt more towards online lending platforms because of more convenience and flexibility of solution.
It needs to be borne in mind however, that there is no one-size-fits-all and convenient solution for all prospective and existing borrowers. A wise financial manager will first examine multiple funding options to identify, judge and then select the most appropriate one that suits his company’s specific needs. You can try a business loan calculator to get an estimate of costs and other fees.
Conventional loaning works for those organizations that seek larger loan with lower fees while online platforms aid those who need a smaller loan amount and quickly, too. Either way, the balance tilts favorably for both concepts, depending on the nature of the borrower and his situational urgency. It’s an evenly poised battle.
Anne is a Senior Author for SBL. She began her career as an independent consultant for local businesses after graduating with a BA in Management. Since that time, she’s expanded to writing as well as consulting to spread helpful knowledge to small business owners across the country.