October 31, 2022 | Last Updated on: January 31, 2023
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.
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.
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.
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.
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 — 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, they’re usually useful as working capital or for larger purchases and investments.
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. They’re 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.
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 — 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, they’re one of the most expensive forms of online small business financing. They’re often considered the financing type of last resort for small businesses.
Like all types of borrowing, online loans have their benefits and issues.
Although the loan application process varies from lender to lender, you’ll typically be able to apply for an online business loan in 15 minutes or less. Here’s what you need to do:
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 can’t 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:
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.
