In the early stages of your small business, you might need a loan to help fund growth. Down the line, when your business has matured but you want to continue to build upon what you’ve built, loans can come in handy again. Online lenders make this funding easy to access without any trips to the bank. Below, learn how to pick an online lender for a small business whether your company is brand new or already a leader in its realm.
Why Choose an Online Lender?
Choosing an online lender offers several advantages over going to the bank to apply in person. That said, online loans often do come from banks and traditional financial institutions – it’s just the way you apply that looks different. Here’s why online loans have certain advantages over other loan types.
- Faster and easier access. To access an online lender, you just have to visit their website. Doing so is much faster and easier than making your way to a bank to apply in person.
- Wealth of information for comparing loans. If you’re at a bank looking at loan options, you might feel pressure to make a fast decision. You also might struggle to make heads and tails of all the brochures or effectively compare and contrast your options. With online loans, you can browse options from home on your own time. You can also start a spreadsheet or any other online document to easily list and see your options at a glance.
- Simple, speedy application. Most traditional banks require borrowers to fill out lengthy application forms - sometimes by hand. Online application processes are simpler and quicker. You can likely breeze through them in one sitting from your computer, though your paperwork requirements might be substantial. Still, going digital is often a step up from traditional lenders’ paper-and-pen applications.
How to Pick an Online Lender for a Small Business Loan
Your choice of online lender will depend on several factors. Some of these factors pertain to your ideal loan, and others reflect who you are as a borrower. Here’s some tips on how to pick an online lender for your small business.
1. Decide How Much Money You Need
If you’re pursuing equipment financing so you can afford an $80,000 machine for your production line, a $75,000 loan won’t meet your needs. Your minimum loan amount should cover the entire expense rather than saddling your business with an immediate burden for the remainder. Choosing the right amount matters, as some loans are only available in certain amounts that could prove too small or big for your needs.
2. Look at Your Business and Personal Credit Scores
Some of the best small business loans aren’t available to small business owners with low credit scores. You should thus check your business and personal credit scores before applying for loans. Some lenders may ask for one or both, though some forms of financing are independent of any credit score. Be realistic about the types of loans your credit score can get you so you don’t spend time applying to loans you may not be able to obtain.
3. Decide Which Type of Loan Best Suits Your Needs
Based on your ideal loan amount, credit score, and the reason you need funding, some of the below loan types will likely work for you.
- Small Business Administration (SBA) loans. The SBA, a federal government agency, backs these loans to minimize risk to lenders. Although this government backing introduces lots of paperwork, the minimal risk lets lenders offer these loans at competitive rates. You can apply online for the below three types of SBA loans if you have good credit.
- 7(a) loans. These loans are the “gold standard” for small business lending. Their long repayment terms lower your monthly payments, and their interest rates are low and variable. These loans are also fully amortized, so you pay less interest on them as time goes on. You can use an SBA 7(a) loan to obtain working capital, purchase commercial property, or refinance your debts.
- 504 loans. If your goals for buying commercial real estate overlap with that of your local Community Development Corporation (CDC), you may qualify for an SBA 504 loan. Your CDC will cover 40% of your loan’s value, and the SBA will cover 50%. Long terms of 10, 15, or 25 years are common for repaying these loans.
- Microloans. Very small businesses are eligible for these loans, which are at most $50,000. You can use a microloan to buy furniture, fixtures, inventory, supplies, working capital, machinery, or equipment.
- Bank term loans. Good credit is also a requirement for bank term loans, but these loans are otherwise easier and faster to qualify for than SBA loans. They can also help you strengthen your credit history since their interest payments are fixed, so consistently paying them on time shows creditors that you’re trustworthy. Beware, though, that their repayment terms typically span one to five years, so their monthly payments are larger.
- Business lines of credit. A business line of credit offers you a certain amount of funding and expires once you use all your funds. You don’t have to use the entire amount, and you’ll only pay interest on the portion of the funds you actually borrow. Small business owners often use business credit lines to cover payroll, marketing, inventory, and equipment costs, though their interest rates can be high.
- Equipment financing. An equipment loan is mostly like any other loan. One key difference is that the equipment you buy with the loan is your collateral, meaning it can be seized if you default. With other loans, your personal or business assets may be collateral. Additionally, at the end of an equipment loan term, you can buy the equipment.
- Merchant cash advances. You can likely obtain merchant cash advances (MCAs) if you process a high volume of credit card transactions per day. Often, MCAs are available to borrowers with bad credit, making them a great option if you don’t qualify for traditional loans. They’re easy to repay, too: The lender will automatically withdraw a portion of your daily credit card revenue. That said, MCA interest rates and fees can be extremely high.
- Invoice factoring. If many of your incoming client payments are held up in accounts receivable, invoice factoring can help restore your cash flow. Invoice factoring companies buy unpaid invoices from you and take a fee to collect the payment from your clients. You’ll pay a weekly fee to the factoring company as they work to collect your invoices, but this fee is often partially refundable.
4. Research and Compare Lenders
Your possible loan types and amounts should give you most of what you need to properly look at and compare potential lenders. Consider a few different lenders for each loan type for which you qualify, then see which lenders and loans best fit your needs and budget.
For example, maybe an online alternative lender would get you funds tomorrow. But when you look closely at the terms and conditions, you might see that you’d pay extremely high interest rates. You might also notice that your monthly payments would be high since your repayment term is short. When you look at SBA 7(a) loans instead, you’ll see low rates, small monthly payments, and interest that decreases over time. That choice might be better if you qualify.
5. Apply for a Loan
Once you’ve found the right loan for your business, apply for it. You might find that several loans work well for your business, but you should only apply for one. There’s no reason to put yourself in a position to take out three loans when only one will do the trick. Plus, applying for just one loan can save you lots of work – even though online loan applications are easier than ever.
Finding Your Funding
The above tips should help persuade you to choose online lenders over traditional banks and show you how to identify the right lender. They should also convince you that SBA 7(a) loans are the best option if you qualify. And if you do, SmartBiz® can help connect you with approved lenders to get the capital you need. Just create a SmartBiz account to begin the process.
WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.