Online Business Loans
Since traditional banks have imposed tighter regulations on lending, a new firm has emerged to cater different entities that cannot qualify for loans: alternative lenders, a general term for non-bank loans.
By the end of the article, you should have already learned the following:
- Sources of online business loans
- Pertinent business and personal credentials
- Things to consider when choosing a creditor
- The different types of online business loans
Where can I get online business loans?
Online banks are basically banks where you apply for a business loan online instead of on-branch. The biggest difference between the two, however, is the application process is much easier with the former. Moreover, as online banks do not have a big sunk cost, they may be able to offer better rates.
P2P websites are middlemen that connects investors to lenders. Serving as a small and more simplified version of a market economy, investors set an interest range and the minimum credit score which they feel comfortable with. Then, as you submit your credentials, members of the other party can express their interest. From the potential loan financiers, you can then choose which best fits your needs.
Small Businesses Administration through SmartBiz
SBA loans usually take months before you get a notice on your approval or rejection, and it can take just as long to get the funding. Now, because of SmartBiz, you can get results on your application just as quickly as you would with other online lenders and SBA loan rates can be great.
What do lenders consider before granting you a loan?
- Personal credit score
Especially for new businesses that are yet to build their credit scores, a personal guarantee is often recurred to secure a loan. A good personal credit score guarantees you a better deal.
- Business credit score
Just as important as the first requirement, taking an online business loan requires information on y our business credit score. Improving this score allows you to get bigger loans later on such as a line of credit. While this is not the only basis for your loan approval or rejection, this gives lenders a general idea on the risk associated with your business.
- Years in operation
Creditors often require a certain number of years in operation before lending you money. However, they become a lot more lenient with this when applying for a business loan online. How long you have been in the business matters as this shows some sort of stability. This is a feature that they look at very favorably.
- Yearly revenues
For certain loans, there is a minimum annual revenue required. This is more of a determinant on the maximum amount which your business can be approved for. However, there are some loans that are not based on this at all.
For example, factoring companies for an invoice financing will look at you the actual amount of your invoice instead of your revenues. However, even when this is not in consideration at all, loaning an amount way lower than your annual revenue can mean a lower interest rate.
- Credit and financial history
The credit and financial history of your company is the most concrete proof of your diligence in settling your date. At the same time, it shows your cash flow and how it varied throughout the years.
What should you consider before taking out a business loan?
- Interest rate and monthly payments
In determining a realistic interest rate range that you may get approved for, you will have to assess your business’ financial situation. You obviously cannot get low rates with bad credit rating, for example.
Still, based on your research, find the one that offers the most reasonable interest rate as this would affect your monthly payments. If you can, try to haggle this as even just half a percentage down can save you money especially for bigger online business loans.
To further earn from their customers, lenders impose some fees other than the accrued interests. Origination fees, processing fees, prepayment fees, and check deposit fees are the most common. Look at how these will affect your business cash flow.
- Customer Service
When you have concerns about your loan, a great customer service can get make all the difference. Because everything is done online, it will be harder for you to address your concerns. For example, the application is taking longer than usual and you want to know what exactly is happening.
You go to a customer representative. Their providing of complete and accurate information can put your mind at ease, and in certain cases, helps you decide on your course of action.
- Creditor Reputation
The reputation of the lending institution is very important. You would definitely not consider a creditor who inserts unnecessary jargons in the agreement to make you unknowingly agree to certain fees, right? Even for matters simpler than this, an honest and reputable lender would not present such problems.
Still, understand that there will always be bad reviews even for the top online lender you can find. Thus, the best course of action here is to define your limits. For example, you can tolerate longer funding times, but not unreasonable interest rates.
- Funding Time
If your business needs the funding immediately, you have no choice but look for the option with the quickest funding time. Here, do not just look at the promises of as quick as within 1 business day. Look at the whole range because some lenders can take a week to award you the loan.
The most reliable way to check this is by reviewing multiple feedback sites as there, you can see what actual customers experienced.
- Ease of application process
To apply for a business loan online, you do not need much effort so there are not as much concerns here. Just upload the necessary paperwork and fill out forms, and you are good to go. Still, some lenders require more documents than others do.
Moreover, consider the standard return time for online applications is 24 hours. Thus, deem results taking longer than that as sub-par.
A collateral is anything of value that you lose to settle your loan. Here, there actually is no more preferable situation. It all relies on your risk appetite and general preferences. Creditors put you as less risky with a collateral securing your loan. This, in turn, guarantees you lower interest rates.
However, it comes with a weighty consequence. If you do not manage your payments, you can end up losing a valuable asset.
Secured vs Unsecured Loans
The biggest difference between secured and unsecured loans is the presence of the collateral: the former has one while the latter has none. Because having something of value to put up if you default on a loan, a secured loan generally has a lower interest rate.
For businesses, a collateral can be your personal assets, with your house and car being the most common, or business assets like the accounts receivable, equipment, or the business itself. Opting a secured loan does have its benefits, but remember, there is a bigger risk associated with it. Failing to settle your balance after the loan term will mean losing your collateral.
Types of Online Business Loans
Here, we will highlight the different types of business loans, along with their different uses.
Equipment financing is used particularly for equipment purchases used in your operations. The equipment is not necessarily some form of machinery. It can also be a software or any other non-labor factor of production essential to your business. Being inherently secured, the equipment bought through this loan serve as the collateral.
However, if you are in a field where technology easily becomes obsolete, this option might not be for you. The last thing you would want to happen is to keep paying for a piece of equipment that is basically deemed useless in your industry. If you have assessed the costs and find equipment financing to be impractical, consider equipment leasing, or basically, renting.
In cash advance, your business will be loaned a certain amount of money. Here, you do not need to allocate a certain amount for the loan as it is automatically deducted from the sales deposited to your business account.
As this is short-termed, you would be informed of how much you need to pay. Thus, you would have an idea how much dent in your business profits this loan would make.
Accounts Receivable Financing
The availability of business loans online is now expanding at a faster rate. Today, you can avail of an accounts receivable financing where the amount indicated in your invoices and other sources of revenue are awarded to you before they are even paid.
In exchange of getting approved for up to 90% of the total accounts receivable, you will have to pay anywhere between 1 to 3 percent as processing fee. Most of the online business loans mentioned here compounds at a regular basis. This is one of the few that does not.
Moreover, accounts receivable financing is secured by your AR, and the balance is paid off as your clients pay you for your goods or services. Failure to complete the payments before the loan’s term ends might mean additional charges, and losing your AR. Thus, consider this only if you have already built a reliable client base and other business streams of income.
Invoice financing is just the same as equipment financing, but with the invoice as your collateral. Here, you get a big percentage from the value of the invoices. Some creditors let you choose what company invoices you want financed, while others do not have this option.
While this can be a good option depending on how much you need, it is very easy to end up paying a lot more than the actual value of the invoice. If the invoice remains unpaid until a week or two after the due date, you can get penalized financially through additional interests and fees.
Business Line of Credit
A business line of credit gives you access to a limited amount of funds, which you can request for anytime the you need it. The beauty of this option is that it functions exactly like your usual credit card. Meaning, the loan amount would not accrue interests until you withdraw it.
Business Credit Card
There are loans for online businesses that very much parallel the features of its non-business counterpart. One of those is the business credit card. Think of your personal credit card, but for business use. That is exactly how it works.
Like your own credit card, this is best to relatively small purchases and not for something as big as setting up another store. This come incredibly useful because unlike in with the line of credit, you do not have to request money from your credit limit as it is already at your disposal.
Working Capital Loans
Most businesses use a line of credit or a credit card to fund their daily operations. While that is a legitimate use of those kinds of online business loan, there is actually a more specialized loan: the working capital loan. Most of the time, this is granted as an unsecured loan. However, depending on your credit history and your chosen creditor, a collateral may also be required.
Meant to temporarily augment income especially in the first months of the business, it is short to intermediate termed. Thus, because of this nature, your payment schedule may be set weekly.
Jason is a Senior Author for SBL. He has been working with small business owners like you for the past ten years. He graduated with an MBA and began a career as an independent financial consultant for small businesses in his state.