Everything you need to know to find the ideal funding option for you.
Online borrowing is an unfamiliar concept for many small business owners. This article answers frequently asked questions (FAQs) about the topic so you can navigate online small business financing.
What is an online business loan?
An online business loan is offered by nonbank lenders, also called alternative lenders. Online lenders and borrowers interact primarily in the virtual world. Unlike banks, credit unions, or other traditional financial institutions which may require you to visit an office to complete the loan application process, alternative lenders typically process applications and approve them online.
What are the benefits of online business lending?
Online lenders typically provide faster funding than traditional small business lenders. They also have more flexible qualification requirements than traditional financial institutions. Some online business lenders approve financing for startups and small business owners with bad credit.
Are there negatives to online financing?
Fast and flexible financing typically comes with a cost when it comes to online lending. Business loans from alternative lenders usually have higher interest rates than bank loans. Annual percentage rates (APRs) can start as low as seven percent and rise to 30 percent or more. Some disreputable lenders charge interest rates over 90 percent to new businesses or owners with bad credit.
Online loans typically come with lower maximum funding amounts and shorter repayment periods than traditional bank loans, although some alternative lenders have financing options with longer terms.
What types of loans do online lenders offer?
There are many types of small business financing available through online lenders. Here are some common ones.
Small business term loans provide a lump sum loan amount that you repay, with interest, over a defined period, referred to as the term. Some online lenders offer short-term loans, with terms of 12 months or less â while others provide long-term loans with longer repayment terms. Some long-term loans, such as those used to purchase real estate, come with terms as long as thirty years.
Because you can repay term loans over an extended period, theyâre usually useful as working capital or for larger purchases and investments.
Business lines of credit
With a business credit line, the lender allows you to borrow against a set amount of money as needed. You only pay back the funds and interest on the money you borrow. You repay the funds over a defined period, typically monthly or weekly.
Business lines of credit are a more flexible type of financing than term loans. Theyâre well-suited for managing cash flow, paying seasonal expenses, covering payroll, and other short-term needs.
Equipment financing is a small-business loan used to purchase machines or equipment. Equipment loans are typically structured as term loans. The repayment period is based on the expected life of the equipment. For instance, if it will wear out in a decade, the loan term would be ten years. Interest rates for equipment financing are relatively low. No collateral or personal guarantee is needed because the equipment or machinery the funds are used to purchase serves as the collateral, which means the financing company can seize it if you fail to repay the loan.
Most businesses can qualify for equipment financing, even with poor or limited credit.
Invoice financing allows you to borrow money against your outstanding invoices. The lender gives you a percentage of your unpaid invoices upfront as a loan or line of credit. Once your customer pays the invoice, you pay the lender back the amount borrowed, plus fees and interest. Fees and interest on invoice financing can be relatively expensive. This financing is good for businesses dealing with cash flow issues because of late payments.
With invoice factoring, you sell your outstanding invoices to a factoring company at a discount. The factoring company will collect payments from your customers directly. While invoice factoring is relatively easy to qualify for, it often comes with very high interest rates. Plus, the collection activities could harm customer relationships. Similar to invoice financing, this form of small business borrowing could be an option for companies dealing with cash flow problems caused by accounts receivable issues.
Merchant cash advance (MCA)
An MCA provides a lump sum of money you repay using a percentage of your future credit and debit card sales plus a fee. A merchant cash advance isn’t technically a loan â instead, the merchant cash advance company buys a portion of your future sales at a discount.
MCAs are fast to fund and easy to qualify for. However, theyâre one of the most expensive forms of online small business financing. Theyâre often considered the financing type of last resort for small businesses.
What are the pros and cons of securing small business financing online?
Like all types of borrowing, online loans have their benefits and issues.
Pros of online loans
- Fast funding. Loans from traditional small business financing companies can take weeks or even months to be approved. Some online business loan companies have a fast approval process and can provide capital in as little as 24 hours. And even if you donât get approved that quickly, most online lenders provide funding within a few days.
- Simplified online application process. Online business loans typically come with streamlined business loan application processes with minimal documentation required. Some may merely check your credit report and review your credit history to determine eligibility. Banks and credit unions usually require you to supply financial statements, bank records, a current business plan, cash flow projections, tax returns, and more. Traditional lending companies rely on a manual review system to evaluate loan applications. By contrast, many online lenders leverage artificial intelligence, online information, and technology. This allows them to underwrite loans more quickly and provide faster application decisions. Money could be deposited in your business bank account in as little as one business day.
- Many types of loan options. There are many different types of financing options available through online lenders. You can find one right for you depending on your business size, funding needs, qualifications, and more. Explore your options to find the right loan for your business.
- Less restrictive qualifying requirements than traditional lenders. To get approved for a business bank loan, youâll need strong credit and to be in business for several years. With online business loans, qualification requirements are typically less strict. Online lenders may consider factors other than your personal credit score, time in business, and the financial health of your business when evaluating your application. Some online financing companies may also work with startups, new businesses, or those with bad credit.
Cons of online loans
- Often come with high interest rates. Online business loans are easier to qualify for, which poses a greater risk for lenders. Online lenders cover that risk by charging more in interest than bank loans. Business loan interest rates at banks start at around five percent, which is increasing because of inflation. Annual percentage rates (APRs) for online loans start at seven percent and can go up to close to 100 percent. APRs for merchant cash advances can be many times that.
- Limited personal support. Some online lenders offer phone- and chat-based customer support. However, you will typically complete the entire loan process online. You may never interact with anyone from the lending company except for a few emails. If youâre looking to build a relationship with a lender or have a loan expert answer your questions, an online business loan might not be the best option.
- Security issues. Most online lenders are highly reliable and above board. However, some bad actors want to take advantage of small-business owners. Predatory lenders try to trap them with offers that seem too good to be true, especially if those business owners are having trouble securing financing. You can prevent yourself from getting taken in by a scam by thoroughly researching and vetting online lenders to ensure theyâre honest and reliable.
How do I apply for an online business loan?
Although the loan application process varies from lender to lender, youâll typically be able to apply for an online business loan in 15 minutes or less. Hereâs what you need to do:
- Determine your financing needs. Figure how much business capital you need, how much debt you can afford, and the right loan type for your business.
- Figure out if youâre likely to qualify. Most lenders will consider your personal credit score, years in business, and annual revenue when reviewing your loan application and determining credit worthiness. Online lenders may also check your business cash flow, financial accounts, and outstanding invoices. Theyâll do whatâs necessary to ensure you can make monthly payments, including pay interest and the dollars you borrowed.
- Compare online lenders. Explore your options to find the best provider for your needs. Research different loan companies. Check out reviews to make sure theyâre reputable and provide good service.
- Submit your application. You should be able to complete and submit your business financing application in minutes. The best lenders have applications that are intuitive and easy to complete. You may also need to upload some financial documents, such as:
- Business and personal bank statements.
- Company financial statements, such as a profit and loss statement and balance sheet
- Business tax returns.
- Agree to a lien and guarantee. Your lender may secure the loan by taking out a blanket lien on your business assets. Youâll also likely be required to sign a personal guarantee, which means the lender could come after your personal assets if you fail to make loan payments.
- Receive your funds. Online lenders typically fund business loans in days, sometimes in as little as a single business day. Before signing a business loan agreement, review the terms and conditions, and if you have any questions, ask the lender.
Are online business loans safe?
Online business loans are secure and legitimate ways to get funding for your business. They can be good options if you need money quickly or you canât qualify for other types of business loans.
Be aware that there are online predatory lenders who want to take advantage of entrepreneurs and small business owners. Here are some warning signs to look out for:
- Lenders that guarantee approval
- Loan companies that make you pay an upfront fee
- Companies that donât have a physical address.
You owe it to yourself to review your online lending options to make sure you work with a legitimate company that meets your borrowing needs and can provide you with the right type of small business loan for you.