Different Types of Loans for Online Businesses in the US

Where to Use Loan for Online Business?

1. Business Startup

Online business technology can be expensive. Along with the technology, business owners also need to officially register their business, meet compliances, rent warehouses, do branding and promote their business launch. All this requires funds, with the help of small business financing, business owners can easily arrange the funds for their startup and start their entrepreneurial journey.

2. Manage Cashflow

Loan for online business can also be used to resolve short-term cashflow problems. Existing online business owners can use the funds to pay salaries, restock inventory, renew tech licenses, provide customer support or even launch online paid campaigns to boost sales.

3. Inventory and Supply Chain Management

Because of inflation, replenishing inventory levels can be expensive. This is majorly true for online businesses that offer multiple SKUs. With a loan for their online business, owners can purchase inventory in bulk at lower prices, do seasonal stocking for peak seasons like Black Friday or Christmas and even pay upfront lump sum payment to suppliers for getting better terms.

4. Digital Marketing Initiatives

eCommerce businesses majorly rely on digital marketing to generate leads and increase revenue. With a loan for online business, they can use the funds towards launching multiple ad campaigns, designing creatives, and even generating assets for SEO and organic marketing.

5. Expand Business to New Regions

After a certain level of growth, small business owners may consider expanding their business to new regions. They can explore funding options to help them with business expansion, including but not limited to business licensing, purchasing warehousing, conducting market research and service optimization.

6. Talent Acquisition

Runing an online business also means you will need to constantly invest in software upgrades. Hiring an inhouse team of designers and developers is the most cost-effective option for this. Along with website or app development, entrepreneurs can use loans for online businesses to hire best in class PPC experts and even content creators.

Types of Loans for Online Businesses

Depending on their business requirements and FICO credit scores, small business owners can apply for multiple types of loan. To get competitive rates, it is recommended that they explore multiple business funding options and then select a lender with easy application process and credit approval.

1. SBA Loans

The U.S. Small Business Administration offers several types of federal loans for online businesses through certified non-profit lenders. Its most popular loan programs are SBA 7(a), 504 and express loan:

• SBA 504: These are unsecured loans for which business owners are not required to submit any collateral. The maximum loan amount that can be availed through SBA 504 loans is $50,000.

• SBA 7(a): These loans are secured but have a strict credit approval. The funding amount in 7(a) loans expands up to $5 million. Online businesses require a strong credit score to be approved for SBA 7(a) loans.

• SBA Express Loans: Express loans are like 7(a) loans but have a faster credit approval. In these loans, the documentation and financial disclosures are done by the business owner instead of SBA. Also, SBA only provides up to 50% guarantee in express loans.

2. Term Loans

Term loans are fixed duration loans for online businesses that can be used for multiple business operations. The key benefits of term loans are that SMBs get to choose from multiple business lending option, and they can decide their own loan duration and monthly payments. This simplifies the entire repayment process. Even non-profit organizations can apply for term-loans and get competitive interest rates. Common types of term loans for online businesses include:

• Equipment Loans: These can be used to purchase working capital and other equipment, such as online servers, computer hardware, printers, work desks, chairs, cabinets, and even digital equipment.

• Working Capital Loans: These types of term loans are like equipment loans, but along with equipment costs, they cover other operational costs, such as salaries and utility bills as well. Basically, anything that is essential to keep the business working can be covered under working capital loans.

• Inventory Loans: With the help of inventory loans, small business owners can purchase inventory in bulk and keep up with seasonal demand surge such as during black Friday sale or Christmas.

• Supply Chain Loans: Supply chain loans cover the entire logistics. From inventory and warehousing to shipping and returns, all these processes come under supply chain loans.

• Real Estate Loans: To start their business operations, online business owners can also take real estate loans to buy commercial real estate such as office space and warehouses.

3. Business Credit Card Loans

Loan for online businesses don't have to be complex. Instead of searching and applying at different lenders, small businesses can also take loans from their business credit cards. In return, they also get the option to convert the loan amount into monthly payments and repay the monthly amount in part or full. Even the origination fee in business credit cards is low.

4. Business Line of Credit

Businesses with high creditworthiness qualify for line of credit at multiple banks and money lenders. They can withdraw any amount from their credit line and only need to pay interest charges on the amount drawn instead of the entire credit line. As small businesses repay the loan, they keep freeing up some amount from their credit line and can again withdraw the same amount as per business requirements. This makes line of credit one of the most flexible loans for online businesses.

Eligibility Criteria for Loan for Online Businesses

Every money lender has separate eligibility criteria for loan for online business. However, the basic requirements more or less remain the same. What can vary is the loan amount and underwriting depending on your credit history, business type, and debt-to-income ratio.

1. Credit Score

Credit score check is essential for business credit monitoring. It gives money lenders a better idea about the credit worthiness of the applicant. In reality, the number of businesses with bad credit is low in comparison to those with good credit. Meaning, if new business owners proactively manage their business and personal credit score, it becomes easier to secure a loan for your online business.

2. Financial Statements

Financial statements, such as tax returns, bank account statements, and your annual revenue are key factors in deciding your eligible loan amount. This goes the same for both term loans, SBA loans, business credit cards and even line of credit. Money lenders even use advanced AI-based software to verify the financial statements of a business.

3. Business Plan

Solid business plan with a viable business model, large total addressable market (TAM), and a diversified revenue generation model has higher chances of securing a loan. A good business plan not only indicates profitability of a business but is also highlights the resilience and agility of the business.

4. Debt-to-Income Ratio

Money lenders prefer giving loan for online business to borrowers who have a lower debt to income ratio. This means, they don't have high older debts and can afford to repay any new loans that they take.

5. Business Age

Business age is a strong indicator of the income stability. In case of rejection, startups can wait for a year or two and re-apply. Other options include opting for pre-qualified line of credit, using credit card loans or debit card financing, which lets small businesses convert large debit card transactions into small monthly payments.

Final Thoughts

Loan for online businesses can be very useful. Not only do they help business enthusiasts enter new markets with their distinctive ecommerce stores and online business models but also help existing businesses overcome economic uncertainties and stay afloat in the market. Today, business owners can even easily apply for a loan through an online application, saving them essential business hours. For more advise, they can consult professional loan advisors or even refer to FDIC for financial guidance and information. As business loans can be disbursed as fast as in two business days, they remain a highly flexible loan options for online business owners.