Table of Contents
- Overview of the Best Online Business Loans
- How Online Business Loans Differ from Bank Loans
- Does Credit Score Matter When You Apply for an Online Business Loan?
- Finding an Online Business Loan That’s Right for You
- What You Need When Applying for a Business Loan Online
- The Bottom Line When You Want to Get a Small Business Loan Online
Online business loans offer an accessible and fast option for business owners who either don’t qualify or can’t afford to wait to get funding through conventional banks.
Many business owners, however, are unaware of how online business loans work and how lending marketplaces can be the resource they need to secure funding for their small business.
In this guide, we’ll take a look at the different types of financing options available and how you can qualify for an online business loan.
Overview of the Best Online Business Loans
The best and worst aspect of choosing a small business loan online is that you have options. A lot of them. Here’s an overview of some of the best online business loans and financing options that your business can take advantage of:
Why Choose an Online Business Lender Over a Bank?
There was once a time when banks were the only places you could turn to for a business loan. Luckily, there are now online alternatives available that can offer funding to businesses that previously could not secure it.
After the financial crisis of the late 2000s, small businesses’ access to bank loans was severely constrained. Unfortunately, that access has been slow to open up.
Online business lenders offer an alternative. With less-stringent requirements and an emphasis on speed and ease of use, alternative lenders are opening doors to small business financing. In fact, according to data compiled by Statista, a global data business platform, in the third quarter of 2019, the rate of small business loan applicants approved by alternative lenders was 56.5%.
How Online Business Loans Differ from Bank Loans
Small businesses that are having a hard time qualifying for a bank loan are often better served by online business loans. Understanding the speed, term lengths and adaptable nature of these loans can help you decide whether an online business loan is the right choice for your business.
With additional risk comes an additional cost. Since online small business loans present a greater risk to lenders, it follows that higher interest rates and annual percentage rates (APRs) will be attached to the loan.
When you take out an online loan, you also pay a small premium for the convenience and flexibility the loan provides. Although traditional Small Business Administration (SBA) loans can be secured with interest rates as low as 6% or 7%, online loans typically have APRs above 10%. The added risk that online lenders are willing to take on and the convenience they provide create costs that make it necessary for them to include these higher rates.
Commercial banks and credit unions aren’t exactly known for their flexibility. You won’t often find banks making concessions to accommodate your business’s every need. It’s more likely that you’ll be presented with a “take it or leave it” offer on a loan instead of a two-party negotiation that satisfies both sides.
Thankfully, online bank loans offer a degree of flexibility that bank loans don’t. Only need to borrow a small principal amount? Loans as low as $10,000 are common among online lenders. Want a short repayment term? Online lenders often grant small business loans with terms as short as 3 months.
Shorter Terms, More Frequent Payments
As you’ve learned, traditional banks generally deal with lower-risk borrowers with positive and lengthy credit histories. This gives them the ability to provide loans with longer terms and higher amounts of capital. With online business loans, however, lenders are willing to provide funding for businesses that may not have the same type of borrowing power as those that can secure bank loans. That comes with risk and a need to protect themselves with different loan terms.
Larger traditional loans could have repayment terms of 10 years with lower APRs because they are secured by businesses that banks have more reason to believe will not default. Online lenders often work with borrowers that make this type of loan too risky for them. Shortening the term to as little as 3 months and requiring weekly or even daily payments minimizes that risk and helps ensure that online business lenders have the ability to recoup their investment.
If you’ve ever applied for a business loan at a bank, you know that the application process is drawn-out and usually involves filling out a huge stack of forms that would make any bureaucrat proud. Once the application is filed, it can then take several weeks to get approved and hear back.
This is perhaps where online business loan applications are most set apart from their traditional counterparts. Free from the same regulations that traditional financiers are strictly held to, online business lenders have the ability to make funding decisions without going through added layers of red tape. Since the online process is digitized, applications can be completed in minutes. From there, lenders run your information through proprietary algorithms that dive deeper into the data to evaluate risk and make decisions faster.
Simply put, you get fast business loans online and are able to access the cash you need quickly. Altogether, the process from application to funding could take just a couple of days. Instead of waiting weeks or months for a bank to get back to you, online business loans provide an exceptionally fast turnaround for businesses that need funding now.
Does Credit Score Matter When You Apply for an Online Business Loan?
Despite what many first-time applicants believe, your personal credit score is one of the most important factors when applying for an online business loan. The confusion is easy to understand. After all, it’s your business lenders are issuing the loan to, not you, so why does your personal score matter?
For those with little business credit history or who are applying for the first time, personal credit scores are sometimes all that lenders have to determine your history of repaying debt. In other words, there is little opportunity to determine your creditworthiness without scrutinizing you as a business and an individual.
Until your business establishes a credit score of its own, it’s unlikely that your personal score will be left off the table when you’re looking to get business funding online. The upside, however, is that you can bolster your business’s chances of getting approved for an online business loan if you pad your personal credit score — for many, this is easier than boosting a business’s credit score. Learn how to understand your credit score. Then check out our video on the 5 C’s of credit — character, capital, capacity, conditions and collateral — and see how these factors impact your loan offering.
Finding an Online Business Loan That’s Right for You
Now that you’ve mastered the requirements for getting a business loan approved, you can move on to finding an online business loan that fits your needs, whether you’re seeking an online small business loan for bad credit or a long-term business loan. Below, we’ll go over some of the best online small business loans and financing options.
Remember, it’s important to keep in mind that not every loan type is suitable for every business owner. Pay close attention to the term lengths and approval times to find a funding option that provides you with capital fast enough to satisfy your needs and does not keep you in debt for longer than necessary.
We recommend considering a term loan if you have a long-term project that needs capital financing. This is especially true of projects that have an estimated completion date that can correspond with the amortization of the loan. To help you make the best decision possible, here’s a run-down of the benefits of term loans for small businesses. Through our funding partners, Fast Capital 360 offers term loans with the following conditions:
- 1-5 year term lengths
- Interests rates from 7%
- Principal amounts from $10,000-$500,000
- Approval as fast as 1 day
Business Lines of Credit
If your business could benefit from having revolving capital, we recommend considering a business line of credit (LoC). With a business LoC you can borrow flexibly, meaning that you can borrow only as much as you need up until you reach a predetermined credit limit.
The problem that many small business owners experience with term loans is that they over-borrow. That is, businesses overestimate how much they need to borrow and end up having to foot the bill for interest on capital they didn’t even need. To prevent this from happening, apply for a line of credit instead.
From a cost-benefit perspective, online business LoCs provide the most bang for your buck. Since you only have to pay interest on the amount you withdraw, you save a lot more money than you would if you received a lump sum for an online business loan that you’d need to repay in full with interest.
We recommend choosing an online business line of credit if you’re a small business owner that needs an undetermined supply of cash. In other words, if you know you need $5,000 up front and potentially a little more (or a lot more) later down the road, then applying for an online business line of credit might be your best bet. Here’s the rundown on online business LoCs offered through the funding partners at Fast Capital 360:
- 6-month to 3-year term lengths
- Interest rates from 8%
- Credit limits between $5,000-$500,000
- Approval as fast as 1 day
Merchant Cash Advance
Merchant cash advances are quickly becoming a common funding source for small business owners, particularly as an alternative to online business loans for bad credit. Known for their lightning-fast approvals and low credit score requirements, merchant cash advances provide a quick fix if you need cash in a hurry or don’t meet the credit score requirements of other online business funding options.
Once you’re approved for a merchant cash advance, you’ll receive a one-time cash infusion that you’ll repay based on a percentage of your sales revenue, determined by the lender. Merchant cash advances can seem costly to first-time borrowers since payments are taken daily or weekly and are calculated using factor rates. On the bright side, however, merchant cash advances offer many benefits that can be the right choice for many businesses.
Merchant cash advances are recommended for business owners that need an expedient, easy solution for a short-term cash crunch. Here’s a short list of some of the main features of online merchant cash advances offered through Fast Capital 360:
- Flexible repayment periods from 3-18 months
- Factor rates starting at 1.14
- Advance amounts from $3,000-$500,000
- Same-day approvals
Businesses that want to get approved for a loan with little credit to their name are well-suited for invoice financing. Under this arrangement, sometimes also referred to as accounts receivable financing, lenders issue a cash payment to businesses in exchange for their outstanding invoices. Of course, those applying for invoice financing must be invoice-issuing companies (i.e., professional service or B2B industries).
In short, invoice financing allows borrowers to collateralize outstanding invoices for a cash advance. The best part of invoice financing is that it does not accumulate debt that needs to be paid back. Instead, the cash advance is issued at a fraction of what the invoices are worth — typically, 80% to 90% of their value, less a processing fee.
Invoice financing, although not the most affordable method of financing a small business, provides convenience when it comes to getting out of a cash crunch.
After all, if you’re a small business owner, the odds are likely that sooner than later your customers will delay the payment of your invoice — when the inevitable cash flow shortage occurs, invoice financing can provide a quick and convenient solution.
Beware, however, that factor fees between 1.0 and 2.0 are often charged weekly until the invoices are paid in full. Below, we’ve outlined some of the main features and selling points of invoice financing through Fast Capital 360:
- Repaid until invoices are paid by customer
- Factor rates starting at 1.02
- Cash advances up to 80% of receivables
- Same-day approvals
Equipment financing is funding specially purposed for the acquisition of capital-intensive equipment, such as X-ray machines, heavy construction tools and other expensive items. Most online equipment loans have repayment terms between 1 and 5 years, and the equipment is not considered rightfully owned by the borrower until the loan is paid in full.
You can also use online equipment financing to lease machinery, tools and tech for your business. Those in the construction, dental or medical industries often rely on equipment financing to gain a foothold in the market. Equipment financing terms, although diverse, typically conform to the following when working with online lenders in the Fast Capital 360 marketplace:
- 1-5 year term lengths
- Interest rates from 8%
- Financing up to 100% of the equipment value
- Approvals as fast as 2 days
The Small Business Association (SBA) has an interest in making sure your small business has the capital it needs to succeed. They do not, however, serve as a lender. Instead, they act as a guarantor that reduces the risk lenders undertake to extend capital to small business owners.
Guaranteeing up to 85% of the loan in some cases, the SBA makes it possible for lenders to provide better interest rates and higher amounts of funding to businesses they otherwise would not approve. SBA loans are essential for entrepreneurs and other small businesses that have found trouble qualifying for traditional funding. They can be slower to acquire than other online business loans, but they do offer many flexible terms that can be great for your business:
- 5-25 year term lengths
- Interest rates from 7.25%
- Principal amounts from $5,000-$5,000,000
- Approvals as fast as 30 days
Like a regular term loan, a short-term loan can benefit small business owners who need to cover immediate expenses or tide themselves over until the end of a cash crunch. Short-term loans typically have repayment terms between 3 and 18 months. In return for a short repayment period, the interest rates are generally higher — usually 10% or more.
Short-term loans are among the easiest to access online. Since banks are generally averse to approving short-term loans, online lending marketplaces have moved in to fill this demand. However, don’t expect to receive a fortune through a short-term loan; most short-term loans offer funding amounts of $500,000 or less.
When it comes to accessibility, it’s hard to beat a short-term loan. This is because online short-term loans can get approved in as little as one day and usually have lenient requirements for approval. The downside, however, is that short-term loans charge high-interest rates compared to longer-term loans.
- 3-18 month term lengths
- Interest rates from 10%
- Principal amounts from $3,000-$500,000
- As fast as same-day approvals
What You Need When Applying for a Business Loan Online
Now that you have an understanding of what different types of online business loans are available and how they could work for you, it’s time to find out how to take advantage of them. First, you have to consider what online business loan companies are looking for from you. There are a few main criteria some of the best online business lenders use.
Time in Business
Online small business loan applicants will be asked to provide a few pieces of information about their business before getting approved. One of the most important aspects of your application is your total time in business. If your business only launched a month ago, your chances of securing a term loan or line of credit will be slim.
To bolster your chances, it’s a good idea to first establish your company and gain a foothold in the market. After one year in business, your company will meet the minimum requirement for some online business loans. After 2 years, you’ll be eligible for approval from a wide variety of online business lenders.
Annual revenues are an important part of securing an online business loan. Unless your business has demonstrated that it can generate revenues and potentially become profitable, both online and conventional lenders will likely consider your application too risky to touch. In most cases, minimum annual revenues of $75,000 are required to qualify.
Typically, conventional creditors look for credit scores of 650 or above. However, some online business lenders will consider applicants with scores as low as 500. In fact, they often have options for borrowers seeking online small business loans for bad credit. The lower the credit score, however, the higher the interest rate will be. Lenders will find your business too risky to guarantee large sums of funding without making you pay for it.
Compare Online Business Loans and Lenders
Now that you have an understanding of what lenders look for in borrowers, it’s time to find the best online business lenders for you. Every company is different, and the emergence of online lending marketplaces makes it easier for you to find the best online business funding options.
Below, we look at the various conditions that several top online business lenders offer on their business loans and financing.
*Note that the following loan conditions were compiled as of January 9, 2020.
Find the Best Online Business Loan
To find the best online business loan for your company, you need to exercise due diligence and shop around for terms and conditions that will work for your business. Ideally, a suitable online business lender will be one that doesn’t lock you into a long-term commitment (if you have a short- or medium-term project that needs funding), will require minimal paperwork and can review your application quickly and painlessly.
Online lending marketplaces, such as Fast Capital 360, give borrowers a resource to find fast business loans online. Working with multiple lenders allows borrowers to be matched to the online business lender that works best for them. Instead of being turned away and needing to look elsewhere, online lending marketplaces may have a lender who can work with a business owner who may have been turned down by another lender.
These marketplaces also handle the facilitation of the loan, making sure every document is in place for your application. Lenders will then be able to provide you with a full and fair assessment to ensure you get interest rates and loan terms that work for you.
How to Apply for a Business Loan Online
Are you thinking, “I’m ready to finance my business online”? The first step is to choose the type of loan you desire and then find a company that matches your needs. Once you’ve done that, it’s time to grab all of your necessary items (i.e., FICO score, bank statements etc.) and apply.
Luckily, applying for an online business loan is easy. Once you have all of the required information, you can apply by simply visiting the website of a trusted online business lender and applying through their web portal.