For an increasing number of small business owners, online business loans have become their top option to meet many of their financing needs.  This new breed of lenders may approve business loans that might be overlooked by traditional banks and can offer a faster route to getting funding.  For many small businesses, their top options for funding are the best business loans online.

This is partially because traditional banks curtailed the amount of small business loans they issue ever since the financial crisis in 2008.  In fact, only approximately 27 percent of small business can qualify for bank loans today.  Into this void stepped online lenders, which have since proven that online small business loans can be a good idea for many small businesses.

Among the advantages online lenders have over traditional banks is speed.  Web-based tools speed up the application process, leading to a faster evaluation of credit worthiness.  New technology also allows online lenders to determine loan eligibility more quickly.  In fact, potential borrowers can be approved in less than an hour, and many times in less than a day.  This is what’s known as an instant business loan.

This quicker turnaround is due to the ability technology gives online lenders to evaluate businesses differently from the traditional methods that many banks use.  For instance, online lenders may research the transaction history and cash flow of a business through the website of the business’ bank to determine the financial health and credit worthiness of a business.  Other digital data and automated systems can also hasten the approval for both short-term and long-term online loans for small business.

Another major difference between online lenders and traditional banks is flexibility.  There are a variety of online business loans available to serve many different purposes.

Online lenders offer unsecured loans with no collateral required, which is rarely the case with traditional bank loans.  In exchange for the lack of collateral, however, online lenders normally charge higher interest rates.  Online lenders are also more likely to approve loans for businesses with lower credit.

While online lenders are more accessible and more flexible, the tradeoff for this ease of doing business is higher interest rates.  The accessibility of online loans increases the risk to lenders, so to minimize their financial exposure in case of default they charge higher rates and fees.

Online loan amounts and terms can vary wildly according to lenders. For example, the amount of a Biz2Credit Small Business Loan can range from $5,000 to $5 million.  Like any other connection service, Biz2Credit helps companies prequalify with multiple lenders at once.  The terms of the loan differ according to these lenders.  Lending platforms like Biz2Credit can work well for small business owners who are new to the world of online lending.

The best online business loans available to small business are:

  • Term
  • Short-Term
  • Business Line of Credit
  • SBA Loans
  • Equipment loans
  • Invoice Financing
  • Merchant Cash Advances

Not every business loan will meet the specific needs of your business, nor will they match the type or size of loan for which your business may qualify.  But one of the online business loans described below may most likely be your best option.

Term Loans

Online term small business loans typically range from one to five years, with rates anywhere from seven percent to 30 percent.  These loans are appropriate for long-term projects such as major renovations, capitalization of equipment of opening new locations.  Whether online or traditional, these loans follow the same basic premise:

  • The borrower applies for a loan
  • Once approved, the borrower receives a lump sum to be used for the specific purpose outlined in the loan application
  • The borrower then repays the loan with interest over a set period of time
  • Once the term of the loan is completed, the loan is considered paid (in most cases) and the transaction is complete

Despite this direct approach, term loans may not always be the best option for a business.  That’s because term loans come with limitations such as:

  • Strict lending policies.  Term loans can only be used for the specific purpose that’s defined in the original loan agreement.  Government regulations impose restrictive compliance requirements and other rules on banks and credit unions.  These restrictions can include the types of businesses they can lend to, or on the amounts of the loans themselves.  Industry restrictions vary by lender, but limitations can apply to industries such as financial services, homebuilders, real estate investors and the like.
  • Longer wait times and terms.  The application process for a traditional loan can be lengthy, especially for more intricate deals.  New businesses or businesses with subpar credit history can also face a long and complicated road to approval.

Short-Term Online Loans

One of the key differences between online and traditional lending is short-term loans.  The ability to secure a small, short-term loan is unique to online lending, as these types of loans are rarely made by banks.

Short-term online loans are typically used for specific, shorter-term projects such as buying inventory, marketing campaigns or working capital. These loans range from three to 24 months, and can be useful to address short-term business financing needs.  Rates start at 14 percent and payback periods can range from three months to two years.   While the rates are high, there are steps business owners can take to reduce the interest rates paid on business loans.

Short-term loans may also require daily or weekly payments, and many short-term loans have fixed simple interest rates.  This means that borrowers will pay the same amount of interest and fees whether or not the loan is paid off early.  Borrowers make fixed payments on these loan until they are paid off.  The interest rates on short-term online loans can be very high.

Whether short or long-term, online business loans are likely to have higher origination fees and interest rates compared to traditional bank loans.  Additional fees are also possible.  Fees and rates differ according to lender, term and risk.  They may still be lower than other options such as cash advances.

Business Line of Credit

Business lines of credit function similar to credit cards in that they allow borrowers access to a set amount of funding.  Borrowers can then draw against that amount until they reach that set limit, then repay the funds with interest until the borrowed amount is repaid.  Terms are typically six months to five years with rates ranging from seven percent to 25 percent.

The differences between a business line of credit and a credit card are as follows:

  • Borrowers don’t use cards.  To access their line of credit, they must make a new request to their lender each time they want funding.
  • Business lines of credit can provide access to much larger amounts of funding than credit cards.
  • Most lenders require businesses to periodically re-apply for their line of credit.

Lines of credit typically provide access to funds faster than term loans, and are more flexible.  Unlike term loans, there are no restrictions on how the funds can be used.  Businesses typically use lines of credit to fill short-term gaps in cash flow or fund a short-term project.  Lines of credit shouldn’t be used for everyday operating expenses.

Small Business Administration (SBA) Loans

The SBA doesn’t issue loans on its own.  Its role is to help small businesses find bigger and better loans that wouldn’t normally be available to them.  The SBA does this by guaranteeing a portion of the loan, which encourages lenders to take on more risk than they normally would.

An SBA loan is an especially good fit for small businesses that have been in businesses for at least two years and an established pattern of success.  The SBA offers a wide variety of loan programs and resources, and these loans have competitive interest rates.  In exchange for these low rates, successful borrowers must have high personal credit scores and strong business financial statements.

But, for borrowers who meet the SBA’s criteria, there’s a strong chance they’ll find an SBA loan that fits their business type and matches its needs.  While it’s usually easier to access SBA loans through a bank rather than online, there are online lenders that offer SBA loans.

Equipment Loans

This type of loan merits its own category because of how they are issued and where they can originate.  The loans are generally tied directly to the equipment being purchased, which is then used as collateral for the loan.  As a result, no money is issued to the borrower when the loan is approved.  The lender can seize the equipment if the borrower fails to repay the loan.

The term of  an equipment loan is normally the expected lifetime of the business.  Rates can range from eight percent to 30 percent and the amount of the loan can be up to 100 percent of the equipment value.

The manufacturer or retailer of the items being purchased can also issue equipment loans directly to business owners.  This can be a great advantage to borrowers during those times when dealers are offering rebates or other incentives to make a purchase.

Invoice Financing

When the cash flow of a small business is suffering because customers are slow to pay their bills, invoice financing may be the answer.  This option involves selling your outstanding invoices for cash.  While funding can be available in as little as one day, invoice financing can be an expensive – and unsustainable – way to run a business.  This is due mainly to processing and factor fees.  Factor fees are the discount invoice companies receive for purchasing invoices before they are due and waiting for debtors to pay them.

Factor fees are calculated by applying a factoring rate either on the amount advanced or on the face value of the invoice.

The lender will usually advance between 50 and 90 percent of an outstanding invoice, and hold the balance in reserve.  Typically, once the customer pays the invoice, the lender sends the balance back to the business owner minus a processing fee of three percent and a factor fee of one percent for every week it takes the customer to pay up.

Merchant Cash Advances

This is another short-term funding option that can be approved and provide cash within 24 hours.  Under the terms of a merchant cash advance, a business owner receives a lump sum of cash from a lender in exchange for allowing the lender to take a fixed percentage of daily credit and debit card sales of the business until the loan is paid back in full.

The repayment rate can be eight percent or more.  Still, this arrangement makes repayment less painful for business owners in slow months, since the amount paid is a percentage of sales.  As a result, the less income means less money being repaid.  But the downside is that high factor rates, which can range between 1.14 percent and 1.48 percent, make merchant cash advances a very expensive option.

Deciding Which Loan Works Best

How do you get an online loan?  The first step is to ask yourself why it’s necessary.  For instance, is the loan to start a business, grow a business, manage day-to-day expenses, or create a cushion in case of unforeseen events?  The answer will determine what type of small-business loan is appropriate.

Since a startup is the riskiest business out there, it’s virtually impossible to get a loan in a company’s first year.  For a business that’s been operational and profitable for at least two years, its current situation will steer it towards the type of loan that best fits its situation.  For expansion, a term loan may be the answer.  For cash flow, a business line of credit may apply.

The next step is to find the right lender.  Once the type of lender and loan is determined, it’s recommended to compare two or three similar options based on the total borrowing cost (principle and interest) and repayment terms.  Of these options, the one with the lowest APR is the best choice.

Whether or not the business qualifies for the loan — or other funding vehicle – will largely depend on the personal credit score of the small business owner.  Personal credit reports are available for free once a year from the three major credit bureaus – Equifax, Experian and TransUnion.  Credit scores are also available for free from several credit card issuers and personal finance websites.

Banks want borrowers with credit scores at least above 680.  Since banks offer the least expensive loans, they’re the most attractive option for borrowers with high credit scores. Those with scores lower than 680 should consider online small business loans.

Once potential borrowers know that they can qualify for the type of loan they need, it’s time to start the application process.  Even though online lenders generally require less documentation, it’s a good idea to provide as much information as possible when dealing online.

Personal information, resumes of all principals, income tax returns, income tax returns, loan history, bank statements and any business-related legal documents are all relevant to a lender.

How to Apply for Business Loans Online

One of the major attractions of all online business loans is the straightforward application process. The loan applications are easy to understand.  Potential borrowers who may be interested in an online business loan apply online, over the phone or by fax.  Less documentation is required than what’s typically needed for a traditional bank loan, but applicants should be prepared to provide the following documents:

  • Social Security Number;
  • Business Tax ID;
  • Bank statements or other link to a business bank account; and
  • Financial statements for larger loan amounts.

The easy application process translates into quicker funding.  Business loans online approval often occur in less than an hour, and funds are usually available in bank accounts within 72 hours.  In some cases, instant online business loans can sometimes be available within 24 hours.

Qualifications and requirements for online business loans vary among lenders, but generally an applicant should be in business between one and two years and have a minimum annual revenue ranging from $100,000 to $250,000.  Online lenders also look for a minimum personal credit score of between 500 and 650, making it possible to get a business loan with less-than-stellar credit. The same rules apply for brick-and-mortar locations and online businesses. Traditional bank loans, by contrast, can require credit scores of between 680 and 800.

Are Online Lenders Safe?

While online lenders aren’t subject to the same high security protocols as banks, small businesses can take steps to help ensure they are protected from online threats.  When researching online lenders, small businesses should look for a TrustE or similar certificate that guarantees that a loan provider is compliant with up-to-date security systems.

Business owners should also check that loan providers use a high level of encryption when storing sensitive and classified information.  Finally, it’s important that business owners are confident that loan providers operate in a transparent fashion about the way in which the company uses their data.  Without these assurances, a business is in danger of having its financial information and other important details traded or hacked.

Traditional banks have a high level of security, starting with their own internal requirements.  They are also regulated by one or more federal or state agencies that demand additional security measures to protect the safety of customers and their money.

A sizable number of online lenders are looking only to deal with small businesses, and offer faster approval and funding than traditional banks.  These lenders are not subject to the same regulations, which make it more vital for business owners to do their own homework before applying for a loan.  Reviews and ratings from the Better Business Bureau and other independent third parties can be an invaluable help in this regard.

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