Running a business takes a lot of commitment, hard work and resilience. One of the things that prevents many people from owning a business or growing their business is financing. Figuring out how you are going to finance your new business or your business expansion is no easy task. Many entrepreneurs start out by asking friends and family for money, which isn’t a horrible way to start, assuming you’re comfortable with the potential risk to your relationship if things turn out. wrong. If you aren’t prepared for this risk, or if you don’t have the luxury of having rich friends and family, all is not lost. There are many options when it comes to business financing, including traditional bank loans, as well as other types of business loans online. The type of loan that is best for you will depend on many factors relating to your personal situation, as well as your business.
Let’s look at some of the differences between online business loans and traditional bank loans:
When looking for a traditional business loan from a bank, they will usually require you to have a good credit history. Otherwise, your application risks being rejected immediately. However, depending on the online business loan provider, your credit history might be less of a problem. Now, that will most certainly result in less favorable terms, but at least it might not exclude you completely. Online lenders tend to be more lenient with things, so it’s always worth a try even with damaged credit.
Amount of the loan
If you are going to need a large amount of money for your business, then you are probably going to be looking for a bank loan or making a capital investment. If you only need a small amount of money, online lenders are probably your best bet. Many online lenders specialize in these small loans because for them it’s a numbers game. They will process thousands of them, so each represents a very small part of their portfolio.
If you need a loan immediately, an online loan is probably your best option. Online lenders specialize in fast transactions, leveraging technology to maximize efficiency. As we talked about in the last point, for online lenders, these loans are a numbers game – they want to process as much as they can. Since much of the process is automated, they can get funding extremely fast. Some may have money in your account the same day or the next day. With a bank, it will be a much longer and more laborious process. If you are applying for an SBA guaranteed loan, it also adds additional complexity. Since loan amounts tend to be larger, it also makes sense for them to take a much more in-depth look at your business and yourself to make sure they are making a good loan decision.
Generally speaking, the interest on bank loans is lower than that of online lenders. Online lenders take more risk, with more flexible guidelines, so they need to assess that risk. Plus, since they typically look for shorter terms and lower amounts, they have to transact a lot more for the business to function. In addition, many bank loans will be guaranteed by the SBA, which greatly reduces the risk of the bank.
Small or large business
Online commercial lenders tend to specialize in small businesses. Since the loans are much smaller than the average bank loans, they have to do a lot of loans to make money – that’s their business model. Banks are looking for larger companies that they can build relationships with. With that in mind, if you are a very small business, it will probably be best for you to find an online lender to work with. Large companies, looking for more money, will want to look to more traditional banking programs.
It is not always easy to determine which commercial lender to go to, but hopefully this has helped point you in the right direction. More and more banks are also starting to adopt some of the practices of online lenders, so over time the two will likely merge. In the meantime, remember that there are plenty of options for small businesses looking for capital. Don’t give up just because a lender says no – there’s always another lender out there.