Small Business Loan For an Online Business: A Quick Guide

The process of getting a small business loan for an online business is mostly the same as if you run an in-person operation. If anything, both types of businesses face the same challenges when applying for funding. These challenges include understanding why certain commonly used loans do or don’t fit the business’s needs and comparing the key features of each loan. The below guide will provide guidance on how you can overcome these obstacles for your online business.

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What is an online business?

An online business is any company that operates primarily or entirely on the internet. Software-as-a-service (SaaS) brands are a great example. So too are e-commerce shops, Etsy crafts sellers, virtual tutors, and plenty more. Their primary difference from “real-life” businesses is their medium. Both types of businesses often need extra funding to grow.

Getting a small business loan for an online business: 6 best loan options

There are dozens of possible online business loans and hundreds of lenders who offer them. The below list includes only the best types of small business loans for an online business.

1. Personal loan

Though technically not a business loan, a personal loan may be more accessible to certain online business owners. If you run a new company with minimal sales history or your credit score is low, you might only qualify for personal loans. Despite the term “personal” in this loan type, you can indeed use the money to fund your online business.

Personal loans are generally easy to obtain from certain online lenders, and traditional lenders such as banks and credit unions offer them as well. Though online lenders’ application and funds disbursement processes may be faster, traditional lenders’ personal loans are typically more affordable. The rapid turnaround on some online personal loans can mask high interest rates that ultimately leave you with too much debt to be worthwhile.

2. SBA loans

The U.S. Small Business Administration (SBA) runs several loan programs you can use to fund your online business. The most common types of SBA loans range from SBA Express loans to highly sought-after SBA 7(a) loans. In fact, the latter is generally considered the best possible loan for any business. If you can handle these loans’ main drawback – a lengthy approval process with a high bar to qualify – you should take advantage and  apply.

SBA 7(a) loans are borrower-friendly because their loan amounts are large, their repayment terms are long, and their interest rates are low. The result is low monthly payments that don’t crush your cash flow almost immediately after they boost it. Additionally, SBA 7(a) loans are highly flexible. You can use them to refinance debt, invest in working capital, or buy commercial real estate.

SBA 7(a) loans can be as small as $30,000 or as large as $5 million. You’ll have between 10 and 25 years to repay your loan. Your interest rate will be 6.25% - 8.50%. This variable rate is better in the long term – fixed rates actually increase your payments over time. Plus, since SBA 7(a) loans are fully amortized, the amount of interest you pay per month decreases.

3. Bank term loans

Despite their name, SBA 7(a) loans come from banks – the SBA guarantees these loans to lessen the lending bank’s risk. As such, bank term loans are often quite similar to SBA 7(a) loans, though their qualification criteria may be less stringent. They’re generally available in two types: short-term and long-term bank loans.

A short-term bank loan is one you repay within a few months or several years. The SmartBiz® network, for example, includes banks that offer loans with terms of two to five years. You’re likely best off using these loans to address your online business’s immediate needs, whereas long-term bank loans are better for growing your business over time. Long-term loans typically have repayment terms of at least 10 years.

Bank term loans can be advantageous because they’re basically SBA 7(a) loans that require less paperwork, which can result in faster approval. However, short-term bank loans can have relatively high interest rates, and long-term bank loans come with fixed, not variable, interest rates.

Additionally, both bank term loans and SBA 7(a) loans require borrowers to have at least two years of business experience. If your online business is newer, other loans may be more accessible.

4. Business lines of credit

A business line of credit is a revolving loan rather than an installment loan like the three loans above. That means you won’t be responsible for monthly payments of equal, predictable amounts. Instead, you’ll have access to a certain amount of money, and you can use some or all of that money for any and all business expenses. You’ll only pay fees and interest on the money that you do use, and once you repay that money, it’s immediately available again.

Your line of credit can be especially useful to cover inventory, equipment, marketing, or payroll costs. Generally, you can qualify more easily than with most other loan types, though some lenders still require good credit scores and prior business experience. Another drawback: Some business credit lines set draw periods after which your funding becomes inaccessible. Typically, shorter draw periods mean higher APRs – and most credit lines charge high interest rates.

5. Invoice factoring

Let’s say your online business needs funding largely because most of your incoming cash is held up in your accounts receivable. In that case, instead of waiting for your clients to pay, you can hire an invoice factoring company. This company will lend you the total sum of your unpaid invoices and then collect payment from your clients. The company will then take a fee upon collecting the invoices.

Invoice factoring can be a great choice if you need cash fast and you don’t qualify for other loan types. It’s also a great choice for obtaining small business funding that sets minimal restrictions on how you use your cash. However, the fees that invoice factoring companies charge are typically higher than with SBA 7(a) or bank term loans. Factoring companies also take over your communications with your clients, and that loss of control can feel uncomfortable.

6. Business credit cards

If you need funding for your online business in a pinch, business credit cards can be a reasonable solution. You can sometimes get approved within minutes, and it’s uniquely convenient to have your revolving loan on a card in your pocket. Plus, many business credit cards give you spending rewards for all your purchases, and over time, these rewards can accumulate into extra cash. Cards can also help you build the credit you need for larger loans.

However, business credit card APRs are typically significantly greater than those of installment loans. Credit card interest rates can also increase depending on how you use your card. Of course, you avoid paying interest if you repay your balance within your billing cycle, but the risk still remains. And there’s another risk unique to credit cards: Bad actors can steal information and use it. That’s not necessarily true with other loans.

Business credit cards are largely similar to business lines of credit – you borrow money from a revolving line and only pay for what you use. However, business lines of credit often have much higher credit limits and potentially lower interest rates. Plus, bad actors can’t steal their information.

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How to choose funding for your online business

As you choose the right small business loan for your online business, you should consider the following factors, and weighing them all can help you make the right call.

1. Loan amount

If you need to cover $30,000 of payroll, a $30,000 SBA 7(a) working capital loan could help. If you were to take out a $300,000 bank loan, you’d still need to pay for the $270,000 you don’t use. Choosing a loan amount as close as possible to what you actually need can minimize your loan’s cost.

2. Additional debt

Many loans will require you to take on debt, which might not be ideal if you’re worried about your long-term profitability. Other loans, such as business credit lines and credit cards, only require repayment of the portion you use. And invoice factoring leaves you with no debt – once the factoring company gets your money, they withdraw their one-time fee and move on. These options may be preferable if you’d rather not put yourself on the hook in the long run.

3. Likelihood of approval

If you clearly meet all the qualification criteria for a loan, then you can consider applying for it. Otherwise, you should ask the lender or a small business finance expert whether applying is worthwhile. You might get a firm no, which means you can save time applying for a loan you never would have gotten. After all, if your credit score is low and your online business is new, it makes no sense to apply for certain loans.

If you get a maybe, try to find other loans for which you know you qualify. If you’re interested in SBA 7(a) loans or bank term loans, you can use SmartBiz to check whether you pre-qualify*. If you do, then you might be able to get the large-dollar, low-cost funding you need.

*We conduct a soft credit pull that will not affect your credit score. However, in processing your loan application, the lenders with whom we work will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and happens after your application is in the funding process and matched with a lender who is likely to fund your loan.

4. Funding speed

Typically, it’ll be a while before you get approved for SBA 7(a) or bank term loans. After you’re approved, you’ll likely have to wait a bit longer until you actually receive your funds. Your patience can pay off – you’ll get the best loan terms possible – but if you need cash now, these loans might be non-starters. Personal loans and business credit cards might be better instead, though their terms will be less favorable. If you don’t need cash immediately, wait it out.

5. Cost

Let's say you’re choosing between a 10-year loan that distributes funding months from now and a one-year loan you can start using tomorrow. While the latter is more convenient, it’s likely more expensive – most rapid-turnaround options charge higher interest rates. Plus, your monthly payments will be larger. That’s why estimating the potential cost of any loan can be important.

Some numbers should help you see why. Repaying $60,000 over one year requires $5,000 monthly payments. Over 10 years instead, your monthly payments would be just $500. These numbers don’t account for interest either – and in almost all cases, longer-term loans come with lower interest rates.

One workaround can be a business line of credit or a credit card. These funding options can be no-fee if – and only if – you always repay your balance each billing cycle. However, if you fall behind, the interest and fees can be so high that they pose a whole new set of problems.

6. Risk

Loans are inherently risky – you’re committing to the fact that you can repay a large amount of money over time. They also come with a less obvious risk: The need to put up collateral or sign a personal guarantee.

SBA 7(a) loans, for example, typically require you to attach certain assets to your loan as collateral. The sum of these assets’ values must equal at least your loan amount. The lender can seize and sell these assets to recoup their losses if you default on your loan.

Other loans require a personal guarantee, which essentially puts up all your assets for seizure if you default. Choosing the right loan means more than evaluating how it could boost your business – it also means considering how it could harm your company.

Find the right loan for your online business

The above small business loans for an online business are great options, and the best fit for your needs will vary based on your situation. That said, SBA 7(a) loans and bank term loans are generally the best of the bunch, and SmartBiz can connect you with them. If you don’t qualify, SmartBiz can consider setting you up with custom financing options including business credit cards, business lines of credit, and invoice factoring. Check whether you pre-qualify* to get help get the funding you need.

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.

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