Your small business may need to obtain loans in the course of its growth for a variety of reasons. Online business loans offer small businesses a convenient financing option that is often easier to qualify for than traditional bank loans.
What is an online business loan?
Online business loans are a type of business loan that is offered and processed entirely online, without the need for you to visit a physical bank or credit union. While traditional bank loans may have more stringent requirements and lengthier application processes, online loans are typically approved and funded faster, with easier qualification requirements.
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Types of Online Business Loans
There are a number of different types of online business loans, all suited for different financing needs and business types. Below, we’ve outlined some of the major types of business loans offered online.
|Loan Type||Best For|
|Term loan||Qualified businesses looking for short or long-term financing needs and predictable repayment schedules|
|Business line of credit||Businesses that need flexible access to working capital|
|SBA loan||Small businesses that have trouble getting approved for more traditional loans but are otherwise qualified|
|Equipment financing||Businesses looking to finance the purchase of new equipment|
|Microloan||Startups and newer businesses looking for small amounts of capital (less than $50,000)|
|Invoice financing||Businesses that regularly invoice clients and have capital locked up in large outstanding invoices|
|Merchant cash advance||Seasonal businesses that take card transactions and need quick access to cash|
|Commercial real estate loan||Businesses looking to expand, renovate, or purchase commercial property|
|Personal business loan||New business owners with good personal credit looking for small amounts of funding|
|Business acquisition loan||Business owners looking to purchase an existing business, buy a franchise, or buy out a business partner|
- Term loans are loans where your business receives money upfront, and the loan is paid back over time on a fixed repayment schedule. The “term” or the period of time that you have to repay the loan is typically 1-5 years. There are also short-term loans that work exactly like traditional term loans but have shorter terms that may be a few weeks to a few months. Businesses take out shorter term loans to finance specific projects over a short period of time.
- A business line of credit is a type of loan that’s similar to a credit card. You can access the line of credit at any time for any business need that arises. You’ll only repay or pay interest on the funds that you take out. Like a credit card, you will refill your “credit line” when you repay what you take out so you can continue borrowing from the business line of credit.
- Invoice financing lets you borrow money against your incoming invoices. Lenders will typically give you a cash advance of up to 85% based on the value of your unpaid invoices. You will repay the lender when your invoices are paid.
- Equipment financing is a type of loan for small businesses that need to purchase a large piece of equipment such as a computer, printer, or machinery. In this type of debt financing, the equipment is the collateral for your loan. Should you stop repaying the loan, the lender can repossess the equipment.
- Merchant cash advances can be approved in as little as a day. You agree to let the lender take a small percentage of your company’s credit card sales until you can pay back the loan in full. One advantage of a merchant cash advance is that you’ll pay less during the times when your revenues are low.
Advantages of an Online Business Loan
There are a number of advantages to online business loans compared to traditional bank loans. We’ve outlined some of the main advantages below:
You May Be More Likely to Qualify
- Less focus on credit scores: People with lower credit scores may find it hard to qualify for a traditional bank loan, which rely more heavily on credit scores. Online business loans typically take into account other factors such as time in business, revenue, sales, and other business data.
- More flexible on track record: While traditional bank loans usually also require high revenues and a minimum number of years in business, online lenders are much more flexible about these requirements and can provide more options for new businesses and startups.
Faster and More Convenient
- Business owners can complete the application process entirely online, starting with online applications that are often straightforward and easy to understand.
- Some borrowers may not need extensive documentation, only requiring a few key pieces of information, including Social Security Number, Business Tax ID, and financial statements.
- Loans could be approved in as little as 24 hours, and the funds could be deposited electronically into your account the next day.
- Online loans open your business up to a variety of products to suit your specific needs, with varying term lengths, payment schedules, and loan amounts.
- Traditional bank loans often have higher minimum loan amounts, and some banks won’t provide loans of less than $250,000. Online lenders, on the other hand, could let you borrow as little as a few hundred dollars.
Disadvantages of an Online Business Loan
- May be a higher cost: Bank loans have the lowest interest rates on the market, while online business loans usually have higher interest rates with APR rates of 25% or more.
- Costs may be harder to understand: Borrowers need to be clear about the interest rate and APR rate as well as any other financial terms that may be used.
- Payment terms may be more inconvenient: Repayment terms for an online business loan may require repayments daily or weekly and failure to pay could result in more fees. Some online business loans will require linking your bank account to draft payments automatically.
- Origination fee: Online business loans typically also have an origination fee which could be a flat fee or a percentage of the loan.
- Less support: Online lenders typically don’t have brick-and-mortor locations where borrowers can visit to speak with someone, ask questions, or get financial guidance. Since everything is done online, it may be more difficult to get in touch with someone or receive personalized support.
Online Business Loan vs. Traditional Bank Loan
It’s important to understand the main differences between an online business loan and a traditional bank loan so that you can better evaluate what type of loan makes the most sense for your business. Every business has its own unique financing needs, so while some may seek funding from an online lender, others may prefer to go the more traditional route. Below, we’ve highlighted some important differences between online loans and traditional bank loans.
- Application process: Government regulations and complex processes mean that getting approved for a loan at a bank may take weeks. Online business loans can be approved in a day, an hour, or even minutes.
- Risk tolerance: Traditional banks typically want to see a strong track record of revenue and a business model and market that is clear to understand. If your business is new or solving a problem in an innovative way, traditional banks might be reluctant to fund it. Online lenders may be more willing to extend credit to riskier businesses.
- Funding amounts: Online lenders are much more willing to let small business owners borrow a small amount of money while traditional banks prefer lending larger sums due to the underwriting cost.
- Cost: While online lenders tend to provide more convenience, less stringent requirements, and faster time to funding, this doesn’t come without additional costs. Typically, online lenders offer much higher interest rates than traditional banks, in addition to a variety of added fees and charges.
Are online lenders safe?
While online lenders may be a newer source of business financing when compared to traditional banks, they can be just as safe and provide additional convenience for small business owners.
As with any online transaction, however, you’ll want to be sure that your identity and financial information will be secure. You’ll need to conduct your due diligence to ensure that the online lender you’re considering is reputable. Research the following questions:
- What do online reviews say about the lender?
- Is there positive news coverage about the lender?
- Do you see any complaints or reports when you do an internet search?
- Are they attached to a reputable financial institution?
If the lender is asking you for cash upfront, contacting you aggressively, giving out overly generous loan terms or guaranteeing approval, you may want to take another look.
There are a variety of loan options and lenders in the market, and it may be difficult sorting through all of the options. AdvisorSmith analyzed over 30 different lenders and determined the top lenders for small businesses. To determine the best lenders, AdvisorSmith considered a number of factors, including financial strength ratings, customer satisfaction data, complaint ratings from the Better Business Bureau, available terms and loan amounts, and availability of information and ease of use of the lender websites.
|National Business Capital||Overall||National Business Capital is a financing marketplace that specializes in connecting small businesses with a variety of loan products and over 75 lenders.|
|Rapid Finance||Short-term Loans||Rapid Finance is an alternative lender known for offering a variety of short-term loans targeted at small and midsize businesses.|
|Lendio||Startups||Lendio is a financing marketplace that works with a variety of lenders, many of whom offer loans specifically for startups.|
|Fundbox||Lower Credit Scores||Fundbox is an alternative lender that is best known for offering lines of credit and invoice financing for small businesses.|
|Accion Opportunity Fund||Microloans||The Accion Opportunity Fund is a non-profit lender focused on providing funding to small businesses, particularly business owners who are underrepresented minorities and women who may not qualify with other traditional lenders.|
For small businesses that need cash fast and small businesses that may not have years of strong revenue, online business loans may be a great alternative to traditional bank loans. As with any financial transaction, it’s vital to evaluate the legitimacy of the lender, the terms of the loans, interest rates, and requirements before you make a decision. Online lenders are going strong and only growing. It’s a fast and easy way to get funding for your small business with an array of loan options that can support your needs.
AdvisorSmith spoke with the following experts to provide critical insight on online business loans for small businesses.
- State Director
- Arkansas Small Business and Technology Development Center
- University of Arkansas at Little Rock
Starleen Van Buren
- El Camino College Small Business Development Center
Q. What are major trends occurring in the small business lending market?
Laura: The small business lending market has experienced waves of change since COVID-19. Initially, commercial lenders came to the rescue of their small business borrowers by providing emergency funds to help customers keep their doors open. This help primarily came through SBA Paycheck Protection Program forgivable loans, but a number of commercial lenders offered lines of credit for small businesses needing working capital to survive the downturn.
COVID-19 also reshaped lending criteria for many projects. Today, we see commercial lenders requesting more investment through increased down payment requirements, dedicated working capital set-aside funds, and detailed contingency plans for the next unforeseeable event.
Q. Are online lenders safe? How do they compare with traditional banks?
Laura: We know of some cases of online lenders operating in a predatory manner, but not all online lenders are the same, just as all banks are not the same.
Our small business clients often feel most comfortable working with local, community-oriented lending partners. Local banks and other local traditional lenders typically understand their market and the small business landscape in the area and are even advocates in the community for the businesses that are their lending customers.
Finding the appropriate lending partner is a balancing act—the lender wants to be sure the project is a good investment, but the borrower should also ensure the lender is a true partner for the business. In today’s lending environment, and moving forward, online and alternative lenders will continue to be an option, particularly for borrowers drawn to the convenience and speed of the online application process.
Starleen: As with anything, due diligence is important when seeking an online lender. It’s important to do some research into the online lender’s reputation for customer service and also do a comparison for rates, terms, fees, etc.
Online lenders are sometimes hard to contact, whereas a traditional bank usually has a brick-and-mortar location you can visit. So if there is a technical issue with your application or funding, it may be harder to get it resolved when you’re working with an online lender. Online lenders may have more competitive rates and terms because they don’t have the same overhead as a bank with a physical location.
Q. Do you have any tips for people looking to receive first-time business loans?
Laura: Getting approved for your first business loan can be challenging. Those who are most successful are those who are most prepared. Do you have a well-crafted business plan? Have you confirmed the financial feasibility of your business? Does market research support the validity of your business idea?
If you’re a prospective first-time borrower, working with a Small Business Development Center (like ASBTDC) before applying for a loan can help you answer “yes” to these questions. Visit America’s SBDC to find your local SBDC office.
Also, commercial lenders enjoy working alongside business owners who are heavily invested in their businesses. When you put in the sweat equity, your lender will notice.
Starleen: Maintain your business records and keep accurate track of your expenses and income. You may need a business plan, financial statements, and tax returns. Maintain your credit and pay your bills on time—that is so important.
Also, seek no-cost help from the SBA partners such as the Small Business Development Centers, Women Business Centers, and Veteran’s Business Centers. They offer no-cost assistance to help you get your business plan (if applicable), loan application, and documentation ready. They want to make sure you are bankable before visiting a lender. You can find the assistance closest to you at SBA.gov.