Small businesses are the lifeblood of the U.S. economy, and financing is the viability of a small business. Small business owners rely on business financing to fuel their growth, to purchase new equipment, hire additional staff, and invest in new opportunities.
Unfortunately, major financial institutions are not lending in amounts under $1 million like they were pre-recession, which means they aren’t lending much to small businesses. “While large business loans have soared to record levels, small business lending is losing ground,” writes Ann Marie Wiersch, a senior policy analyst in the Community Development Department at the Federal Reserve Bank of Cleveland.
In response, a rise in online business lending is sweeping over the small business lending space. In a recent Federal Reserve survey 18% of small business owners reported looking for capital online with a 38% approval rate, compared to a 31% approval rate at large national banks. A new generation of online lenders is surfacing with the promise of an efficient, streamlined application process with quick turnaround times and higher approval rates.
With online business lending a small business borrower fills out an online application, which generally takes 30-60 minutes. They get a response within hours and can be funded in a matter of days. This process is an attractive solution for small business owners who on average spend 26 hours on the traditional loan process and wait weeks or even months for an answer from a bank.
Many online business lenders use technology to evaluate the risk of a business differently from traditional lenders. For example, online business lenders may access a company’s online payment transactions and cash flow via their bank accounts or analyze other digital data points to review a business.
Although online business lending offers speed, convenience, and the opportunity to get funding fast, there are important factors small business owners need to look out for.
These factors include but are not limited to the following:
Terms of repayment – Online lenders provide business owners with a variety of repayment terms. Depending on the lender, the short-term business loans may range from 3 to 24 months while the long-term loans range from 1-5 years. It’s also important to note that methods also vary depending on the lender. Some online business lenders require a fixed amount to be paid on a daily or weekly basis via ACH, while others require a traditional monthly payment.
Interest rates – Online business loans tend to have higher interest rates compared to traditional bank loans. Look for online lenders offering competitive interest rates, and keep the loan amount small. Instead of paying thousands of dollars in interest, find a loan with a good interest rate. Although the rates offered online are higher compared to bank loans, they are typically lower than options such as merchant cash advances.
Security – When you apply for a business loan online, it requires you to furnish sensitive data, such as a Social Security number, business information and bank account details. Look for encryption or security measures on the site such as SSL (Secure Socket Layer) encryption and privacy measures – which should be disclosed on the website.
With banks maintaining a tight grip on loans, more and more business owners are turning to online business lending and non-traditional lines of credit for their financing needs. While online business lending has its place in the alternative lending landscape; it’s crucial for small business owners to do their due diligence and research.
Online business lending can be an attractive and viable option. But, hiding behind the flashy websites, impressive videos, and the promise of instant funding, are pricey products that can quickly get a business into trouble if they are not used in the correct way.
Marco Carbajo is a business credit expert, author, speaker, and founder of the Business Credit Insiders Circle. He is a business credit blogger for Dun and Bradstreet Credibility Corp, the SBA.gov Community, About.com and All Business.com. His articles and blog; Business Credit Blogger.com, have been featured in 'Fox Small Business','American Express Small Business', 'Business Week', 'The Washington Post', 'The New York Times', 'The San Francisco Tribune',‘Alltop’, and ‘Entrepreneur Connect’.