Table of Contents
- Online Business Loans 101
- The Differences Between Online Business Loans and Bank Loans
- Mastering The 5 C’s of Credit
- Finding the Loan That’s Right for You
- Everything You Need to Know When Applying for an Online Business Loan
When searching for a small business loan to help grow your company, you have a few different options to choose from. Outside of the traditional bank loan, online business loans offer a more accessible and faster option for those who either do not qualify or cannot afford to wait to be provided funding through traditional methods.
Many business owners, however, are unaware of how these loans work and how lending marketplaces can be the resource they need to secure funding for their small business.
In this guide, we will take a look at the different types of options available to you and how you can qualify for an online business loan.
Online Business Loans 101
The best and worst aspect of choosing a business loan is the fact that you have options. A lot of them. Here are the most popular current online business loan options that your business can take advantage of:
- Term Loans: The best option for business owners with an established credit score.
- Short-Term Loans: Ideal for covering a one-time expense.
- SBA Loans: Good for profitable businesses that have been operating for at least 2 years.
- Business Lines of Credit (LoCs): Suitable for business owners with revolving capital needs.
- Invoice Financing: Helpful for businesses with cash tied up in unpaid invoices.
- Equipment Financing: Ideal for entrepreneurs needing capital to purchase equipment.
- Merchant Cash Advances: A reliable solution for business owners with a poor credit history.
Why Choose an Online Loan 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 who previously could not secure it.
After the financial crisis of the late 2000s, access to credit for small businesses was severely constrained. Unfortunately, that access has not opened up during the recovery. According to the Federal Reserve, small business loans on the balance sheets of banks are down 20 percent since the financial crisis. Consequently, obtaining the capital you need to run your business and grow is hardly a sure thing.
Online 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 possibilities.
The Differences Between Online Business Loans and Bank Loans
Small businesses that are having a hard time qualifying for a bank loan are often better served by online lenders. With different criteria and terms than bank loans, many small businesses must look to online loans to satisfy their needs.
The differences that set these loans apart could be perfect for your situation, so it’s important to know what these criteria and advantages are. 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 percent, online loans typically have APRs above 10 percent. 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. Try finding that at a commercial bank.
Shorter Terms, More Frequent Payments
As you have 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, they 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 are working 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, helping to ensure they have the ability to recoup their investment.
Nothing feels slower than applying for a bank loan. If you’ve ever applied before, 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 lenders have the ability to make funding decisions without going through added layers of red tape. Since the online process is digitized, rounding up all the necessary files in PDF form can take as little as an hour. 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 the cash you need faster. With the emergence of online banking, depositing money into your business account has never been easier. Altogether, the process from application to receiving 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 Your Personal Credit Score Matter When Applying 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 a business loan. The confusion is easy to understand. After all, it’s your business they’re 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 often all banks and creditors have to determine whether you can be trusted. 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. The upside, however, is that you can bolster your business’s chances of getting approved for a loan if you pad your personal credit score—for many, this is easier than boosting a business’s credit score.
Mastering The 5 C’s of Credit
The infamous “5 C’s” of credit are the most important factors that underwriters and creditors account for when evaluating your business’s creditworthiness. Below, we’ll break down all 5 of these factors and why they’re so important to maintain if you want to raise your chances of getting approved for a loan your business needs.
Believe it or not, banks and online lenders alike take more than just a quantitative assessment of your company. More and more online lenders are now taking a more holistic approach to determining your creditworthiness. This process involves less-tangible factors such as your reputation and your LexisNexis RiskView report.
The truth is, a FICO score and other quantitative credit risk measures don’t tell the whole story. For a lender to truly get a sense of how trustworthy your business is, they need to check everything from how long your company has been in business to the total sum of collections and liens over the past several years. Lenders even look at qualitative measures of success such as public reviews and other “character credentials” when evaluating your application.
In the most basic of terms, you could say that capital is the net worth of the borrower. Some look at it as an assessment of how much a borrower can initially put towards a loan, such as a down payment on a mortgage. But it’s more than that.
When a creditor assesses capital, they’re looking to find out if you’ll have the money to fulfill payments for the life of the loan. Even if you have enough to drain your bank account and make a large down payment on that mortgage, a lender could foresee a chance that you’ll not be able to keep up with payments in the future if you’re not capable of continuing to raise capital. Business lenders then have to look at what the owner is capable of and has already put into their business to assess whether they’ll be able to make all of their payments in full and on time.
It’s a little-known fact that your company’s debt-to-income (DTI) ratio is one of the major factors that go into whether you get approved for a business loan. Your DTI ratio provides a bite-sized snapshot of your company’s fiscal capacity. In other words, it informs creditors about whether your business has the means to pay off its existing and additional debts.
If you read our overview of the debt-to-income ratio, you know that you should ideally aim to keep your company’s DTI ratio below 36 percent and never over 49 percent. Below 36 and lenders see your borrowing capacity as favorable, and between 36 and 49 percent is where they will start to find potential cause for concern. With any more than half of your income slated for current debts, banks and online lenders will doubt your capacity to pay off any additional debts they may provide—whether it’s an SBA, equipment or basic working capital loan.
If you’re curious about what your business’s DTI ratio is, you can use an online DTI ratio calculator or pull up your balance sheet and plug your numbers into this formula:
(Total monthly debt repayments / gross monthly income) x 100 = DTI ratio
The conditions lenders use when judging creditworthiness deal with some things business owners can control, and some things they can’t. Instead of focusing only on the financial terms of the loan and what you have in your bank account, lenders need to understand more about what internal and external factors can affect the future of the loan.
On the business owner’s end, lenders like to know what the loan will be used for. Commonly, this could be for business expansion or equipment financing. If they judge that the loan will be used for responsible reasons that will not hurt your company’s ability to make good on the debt, they are more likely to see the transaction favorably. Outside of the owner and the business itself, however, broad economic and industry outlooks can change how a lender feels about a potential loan. If they find negative industry trends or a change in the competitive landscape, lenders could see an increased risk regardless of other positive factors.
Last, collateral needs to be considered before any small business owner decides to apply for a loan. If you own a start-up or are a new entrepreneur, you may have little or no credit history to your company’s name. You also could have a longer history, but it may not be positive enough to secure favorable loan terms without adding risk to the lender. In either case, you may need to set aside a lump sum of cash or other liquid assets to put up as collateral.
Collateral is a financial pledge that a borrower makes to the lender that is used to secure the loan against the risk of default. In other words, collateral is (usually) a sum of cash that is recouped by the borrower in case repayments can no longer be made by the borrower. Most small business loans require some form of collateral to get approved.
Don’t have cash reserves laying around? No problem. Here’s a short list of some other assets that can be used as collateral to secure the loan:
- Blanket lien
- Home equity
- Real estate
- Business or personal vehicle
- Machinery and equipment
- Accounts receivable (i.e., invoices)
Finding the 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 a loan that fits your needs the most. Below, we’ll go over the most common forms of business loans that can be applied for online.
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.
Your standard term loan is probably the first thing that comes to mind when you think of applying for a business loan. These loans, traditionally offered by banks and credit unions, are generally medium or long-term loans (i.e., 5 years in length or longer).
These loans afford your business with a cash sum that is to be repaid over a predetermined span with interest. Although once exclusively the domain of banks, traditional term loans can be applied for through online lenders.
Unfortunately, many small businesses are often turned away by banks after applying for a term loan. Due to the typically higher amount of funding involved, and the increased length of time the loan stretches over, these loans are given less frequently as traditional lenders are becoming more risk-averse. For this reason, secured term loans are becoming more commonplace with small business owners applying for loans online.
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:
- 1-5 year term lengths
- Interests rates from 7%
- Principal amounts from $10,000-$2,000,000
- 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. In other words, lines of credit allow you to take what you need and not a penny more.
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 LoC 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’ve withdrawn from your LoC, you save a lot more money than you would if you received a lump sum loan that is to be fully repaid with interest.
We recommend choosing an online business LoC 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 a LoC might be your best bet. Here’s the rundown on online business LoCs:
- 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
Although it’s usually not the first thing you think of when you consider an online business loan, merchant cash advances are quickly becoming one of the more popular funding sources for small business owners. Known for their lightning-fast approval periods, merchant cash advances provide a quick fix if you need cash in a hurry.
Once you’re approved for a merchant cash advance, you’ll receive a one-time cash infusion that will be repaid gradually as the lender will take a predetermined percentage of all sales revenue. Merchant cash advances can seem costly to first-time borrowers since they are taken so frequently 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 an online merchant cash advance:
- Flexible repayment periods from 3-18 months
- Factor rates starting at 1.14%
- Principal amounts from $3,000-$500,000
- As fast as same-day approval
Businesses that want to get approved for a loan with little credit to their name are well-suited for invoice financing. Under this arrangement, 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 percent of their value, less a processing fee.
Invoice financing, although not the most affordable method of financing a small business, provides the best in 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 and 2 percent are often charged monthly until the invoices are paid in full. Below, we’ve outlined some of the main features and selling points of invoice financing:
- Repaid until invoices are paid by customer
- Factor rates starting at 1.02%
- Cash advances up to 80% of receivables
- As fast as same-day approval
Depending on the industry that you operate in, you probably need to finance a sizeable amount of equipment.. For this, equipment financing options are available to help get your operations off the ground and running without interruption.
For instance, if you own a business in the dental or medical field, you’ll likely need to finance the equipment through external sources. In this case, securing medical equipment financing can provide your company with cutting-edge equipment under affordable terms that can be repaid gradually.
Equipment financing is a loan specially purposed for the acquisition of capital-intensive equipment such as x-ray machines, heavy construction tools, and other expensive items. Most equipment loans have repayment terms of between 1 and 6 years and the equipment is not considered rightfully owned by the borrower until the loan is paid in full.
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 general expectations:
- 1-5 year term lengths
- Interest rates from 8%
- Financing up to 100% of the equipment value
- Approval 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 to owners. Instead, they act as a guarantor that reduces the risk lenders undertake extending capital to small business owners.
Generally guaranteeing up to 85% of the loan, the SBA makes it possible for lenders to provide better interest rates and higher amounts of funding to businesses they otherwise would not give them to, or even consider lending to at all. 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 6%
- Principal amounts from $5,000-$5,000,000
- Approval as fast as 30 days
Like a regular term loan, a short-term loan can benefit small business owners that need to cover immediate expenses or tide themselves over until the end of a cash crunch. To be considered a “short-term” loan, the term length should be between 3 and 18 months. In return for a short repayment period, the interest rates are generally higher—usually going north of 10%.
Short-term loans are among the easiest to access online. Since banks are generally more averse to approving short-term loans, online lending marketplaces have moved into the market to fill this demand from business owners. However, don’t expect to receive a fortune through a short-term loan; most short-term loans are worth $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 approval
Everything You Need to Know When Applying for an Online Business Loan
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 potential lenders are looking for from a borrower. There are a few main criteria lenders use, and after performing a self-evaluation we can find the perfect lending partner for your business.
Time in Business
Online small business loan applicants will be asked to provide a few pieces of information about the 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 term loans. After 2 years, you’ll be eligible for approval from a wide variety of online 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 traditional lenders will likely consider your application too risky to touch. In most cases, minimum annual revenues of $65,000 are required before applying.
You have already learned about the 5 C’s of credit, but it’s important to know the minimums that many lenders have when looking at your credit report. Typically, creditors look for credit scores of 650 or above. However, some lenders will consider applicants with scores as low as 500. 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.
Comparing Online Business Loans
Now that you have an understanding of what lenders look for in you, it’s time to find the best one for your business. Every company is different, and the emergence of online lending marketplaces make it easier to find the perfect loan for you.
Below, we look at the various conditions that several top online lenders offer on their comparable business loans.
|Lender||Principal Amounts||Rates||Credit Req.||Business Req.||Addtl. Info|
|Bluevine||$5k – $5m||4 – 62%||530+||6 months in business|
|Currency Capital||$5k – $2m||Up to 25%||590+ personal||6 mths/$75k annual revenue|
|Credibility Capital||$50k – 450k||Up to 25%||675+ personal||$250k annual revenue|
|Smartbiz||$30k – 400k||8 – 11%||650+ personal||2 years||SBA loan specialist|
|Business Backer||Up to $200k||1.07 – 1.5 factor rates||550+||1 year/$180k revenue||Merchant Cash Advance provider|
|OnDeck||Up to $500k||Up to 80%||500+||1 year|
|Credibly||Up to $400k||Up to 36% (1.09 factor rates)||500+||6mnths/$15k/mth revenue|
|Quarterspot||$5k -250k||Up to 70%||550+||1 year|
Finding the Best Online Term Loan
To find the best term loan online, you need to exercise due diligence and shop around for the best terms and conditions for your business. Ideally, a suitable lender will be one that doesn’t lock you into a long-term commitment (if it’s 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 the best loan possible for their business. Working with multiple lenders allows borrowers to be matched to the 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 an owner that another could not, removing the need to start over with paperwork and pre-qualification somewhere else.
These marketplaces also handle the facilitation of the loan, ensuring every document is in place to get the business owner a full and fair assessment by the lender. This ensures that you can find the best interest rates and loan terms possible when trying to grow your business.
How to Apply
After evaluating your business’s creditworthiness, choosing the type of loan you desire and finding a company that matches your needs, it’s time to grab all of your necessary documents (i.e., FICO score, balance sheets, etc.) and apply.
Luckily, applying for an online business loan is easy.Once all the required information is collected, you can apply by simply visiting the website of a trusted online business lender and applying through their web portal.
The Bottom Line
With banks that have traditionally funded small businesses being more cautious than ever, online business loans have become extremely important. Without them, businesses would have nowhere else to go to find the capital they need to grow their business and stimulate the economy. They can be a lot to wrap your head around at first, but hopefully now you have all of the knowledge necessary to make the best decision for your unique situation. After that, you’ll be in line to take your business to the next level.