Small businesses have historically struggled to obtain funding from traditional lenders. Banks and credit unions typically have much stricter requirements to qualify for their loan products as they want businesses to be at least two years old and owners to have excellent credit scores. Applications also require a lot of paperwork, which can include business plans, legal documents and analyses of the competition and the industry. Even when borrowers are approved to take out bank loans, they sometimes have to wait a few weeks or a few months to get their funds.
Alternative online lenders have stepped in to fill this funding gap. Fueled with their mission to provide necessary capital to small businesses and equipped with their technology platforms that allow for more efficient underwriting methods, online lenders have become a great solution for small businesses seeking funding. Businesses that have been unable to qualify for loans before may be eligible for financing from online lenders since they typically have more lenient eligibility requirements.
Still, online lending has its critics. The industry as a whole is unregulated and at times, consumers have to do a lot of digging to find important details about certain lenders. How can you tell which lender is the best for your business? It is always best to research multiple online lenders and make comparisons about the following loan characteristics.
- Qualifications. Some online lenders require you to be anywhere from a few months to two years in business, which is much more lenient than traditional lenders. They will usually require a minimum monthly revenue, but their credit score minimums are low, which can opens up this option to a bigger population.
- Repayment options. Loans can be great to get the funds you need, but be sure to check out what your repayment schedule will look like. Will daily or weekly repayments affect your overall cash flow? Can you keep up with such frequent bills? These are all factors to consider when choosing the best loan product for your business.
- Application process and funding time. Unlike traditional lenders, online lenders typically do not require a lot of paperwork. At most you'll need bank statements, tax returns, business details and personal information. Sometimes lenders only require you to link your other online financial services to their account. Applications are all online and take a few minutes to complete. Before you apply, make sure you have all the necessary paperwork to speed up the process. Some lenders can deposit funds in as quickly as one business day while others can take up to two weeks. This deposit rate is much faster than that of banks.
- Loan amounts and terms. Online lenders usually offer a wide range of loan amounts. Depending on whether you want to borrow funds for a shorter or longer term, there are plenty of options. Be aware that long-term loans can end up costing you significantly more in interest. The APR on online loans is already pretty high, so you want to consider this point carefully. This brings us to our last point.
- APRs. One of the trickiest and most important factors to look for when comparing online lenders is the annual percentage rate, or APR. The APR gives you the total annualized rate that includes fees and interest costs for your loan. Unfortunately, many lenders do not provide APRs and will list their own interest rates, fees and factor rates, which makes apples to apples comparisons difficult to make. Take your time and make sure you understand the total cost of borrowing funds before committing to one product.