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Running a small business during the COVID-19 pandemic is especially challenging. From managing cash flow, payroll, and other business expenses, to making sure you and your staff are safe and healthy, there’s a lot to consider. If you need financial assistance during this difficult time, the Small Business Administration's (SBA) offers coronavirus relief options, which include the, EIDL Loan Advance, SBA Express Bridge Loans, and SBA Debt Relief. With the SBA’s help you can secure funding to help recover from the economic impact of the pandemic.When you’re looking to get funding for your small business there are numerous options to choose from, but they can largely be categorized into traditional and alternative lenders. Traditional lenders include banks and credit unions. Alternative lenders are any that fall outside of the traditional lending category, particularly those that offer financial products online.Amongst those alternative options are online business loans, which have grown in popularity in recent years.Online business lending may help small business owners secure funding quickly and easily without ever having to visit their local bank. Using algorithms that take creditworthiness, business performance, and other factors into account, many online lenders are able to quickly analyze and provide small business owners with funding options. The application process is typically completed online and gives potential borrowers the opportunity to compare financing that may work for their unique needs. As online business loans continue to increase in popularity, it’s helpful to understand how they work and what they offer. Check out our guide on some top lenders, key benefits and risks, and different types of online loans to consider.
Common Uses for Online Business LoansOnline business lending offers small business owners funding opportunities that may not exist otherwise. This is important since small businesses often struggle to survive their first couple years. In fact, the U.S. Bureau of Labor and Statistics reports that about 20% of businesses fail after just one year in operation. With the help of online business loans, applicants are generally more likely to receive expedited funding even if they can’t obtain loans from banks or have bad credit. While there are a number of different online financial products available, they tend to fall into one of two categories: cash advances and loans or lines of credit. Once secured, online business funding can be used for common business-related expenses, including:
- Working capital: Funds to help maintain short-term, daily business operations such as payroll, rent, marketing, and insurance. Working capital is the value of a business’ current assets minus current liabilities.
- Equipment: Funds can help purchase items like office equipment, tools, vehicles, kitchen appliances, and more.
- Inventory: Funds can help with stocking up on inventory either in preparation for a busy season or to capitalize on a good deal from a manufacturer or wholesaler. .
- Cash flow management: Having funds to maintain cash flow is crucial to running a business. Online commercial loans can help small business owners manage their cash outflows without putting as much strain on the business financials
Who Benefits from Online Business Loans?Virtually any business can apply for business loans online and benefit from them, and there are many types of businesses that may be good candidates. These may include:
If you think your business may benefit from online business loans, it’s important to also weigh the pros and cons of borrowing this type of financing, which we’ll cover next.
- Small business startups: These businesses have a growth-mindset but may not have the history or business credit to get approved for a bank loan. Startups can use online business loans to get established with less expensive purchases like inventory, office supplies, and small equipment, and lines of credit for unexpected or recurring expenses.
- Businesses with poor credit or no credit: Small businesses that aren’t established often don’t have enough history or revenue to qualify for large bank loans. Additionally, a business with little or poor credit will often struggle to find adequate financing. Bad credit business loans from online small business lenders may offer the necessary financing needed to grow or start your operation, regardless of creditworthiness.
- Businesses needing funds quickly: One of the biggest advantages of online business loans is their quick review and approval process. Bank loans can take weeks or even months to be approved, leaving businesses without necessary funding for extended periods of time. Online lenders can often approve and fund loans within days, and sometimes even within a few hours.
- Businesses needing short-term financing: For businesses who don’t want to commit to a long-term business loan, online lenders also offer short-term financing, or loans that can be paid back in less than 18 months. Keep in mind that short-term financing typically comes with high APRs.
Bank Loans vs. Online Business Loans: What’s the Difference?The biggest and most obvious difference between bank loans and online business loans are the lenders themselves. Bank loans are funded by traditional banks or credit unions and typically have to be applied for in-person. Online small business loans are offered by a variety of financial technology (“fintech”) companies and lenders, and can be applied for using an online application.The convenience of getting an internet business loan can be very attractive, but like any financing, it comes with precautions. Even though online lending is growing in popularity, commercial banks still provide a majority of small business loans–but they aren’t easy to qualify for.
To help you further understand how bank loans and online business loans differ, we’ll go over a few of the advantages and disadvantages to online funding in relation to traditional bank lending.
Online Business Loan Advantages
- Flexible: Online lenders typically go beyond traditional bank offerings, which include term loans, lines of credit, and credit cards. With online business loans, you likely have more flexibility with loan amounts, terms, qualifications, and loan products, including cash advances and peer-to-peer lending.
- Fast: Compared to bank loans, online business loan applications typically require less paperwork and can be processed much faster due to technology.
- Able to compare multiple options: With online lender comparison tools, you can compare different lending options matched to your qualifications and needs with just a few clicks of your mouse.
- Readily available: Online business loans are available at various rates, terms, and conditions for businesses of any size and with various funding needs. No matter what your business needs and goals are, there’s likely an online lender who can help.
- May be easier to qualify for: Compared to traditional banks, online small business lenders may be more likely to provide funding to medium- or high-risk applicants because they consider factors beyond credit score, like education, job history, and business revenue. It may also help that online lenders typically offer smaller loan amounts, which are less risky to them. Additionally, they may not require collateral in the form of business or personal assets, which can be helpful for businesses that don’t have the collateral required for some bank loans.
Online Business Loan Disadvantages
*The Small Business Borrower’s Bill of Rights was written by a network of non-profit and for-profit lenders, investors, and small business advocates known as the Responsible Business Lending Coalition (RBLC). It is not a formal legal document. The different clauses in the Bill reflect the RBLC’s “commitment to innovation in small business lending and serious concerns about the rise of irresponsible small business lending.”
- May be more expensive: Rates and fees for online business loans can be higher than those of bank loans, due in part to their high level of accessibility. Generally, the riskier it is to lend to a borrower, the higher the interest rates and fees are.
- Limited in-person interaction: Because they don’t have storefronts like traditional lenders (e.g. banks, credit unions), your face-to-face interaction with alternative lenders may be limited. Some business owners may prefer the in-person interaction to build the relationship and trust with a potential lender. If you relate to this, know that some alternative lenders participate in the Small Business Borrower’s Bill of Rights*, which signifies they are self-regulating in an effort to remain transparent with their lending practices.
- Less established: Ironically, some online small business lenders could be small businesses themselves. Certain online lenders may not have the same financial stability or safety that traditional banks can offer.
Types of Online Business Loans
Term LoansOnline lenders offer term loans for small business owners who need a fixed amount of funding. The borrower pays back the loan (plus interest) in installments over a specified repayment schedule. Lenders set interest rates and terms based on a borrower’s qualifications, loan amount, and other conditions.
Business Line of CreditOnline small business lenders offer business lines of credit, which can help maintain cash flow by covering small, short-term costs or unexpected expenses. Lenders approve a maximum amount from which you can draw from on a revolving basis with interest only charged on unpaid balances. Even though business lines of credit are similar to business credit cards, they often offer cash advances in higher amounts and with lower rates.
Equipment Financing Equipment financing is a type of small business loan for purchasing of necessary business-related supplies and machinery. They are typically short- to medium-term loans that are paid off within a few years. The equipment acts as collateral on the loan, so they can be relatively low-risk for lenders.
Inventory FinancingInventory financing is an asset-based term loan or line of credit that a business receives in order to purchase more inventory, maintain cash flow, or support working capital. Usually, the inventory being purchased acts as collateral for the loan. The borrower then uses the revenue from selling the inventory to pay back the loan or line of credit.
Invoice Factoring or FinancingInvoice factoring involves selling your invoices to a factoring company who then collects payment from your customers. With invoice financing, you use unpaid invoices as collateral to receive cash from a lender. Invoice factoring and financing can both be helpful financing options for small B2B businesses that deal regularly with invoices or irregular payment schedules.
Peer-to-Peer (P2P) LendingAnother category of online business loans is peer-to-peer (P2P) lending. P2P lending networks match borrowers directly with individual investors, cutting out the financial institution “middle man”. Loan applicants and lenders create profiles on P2P websites, where they can search for funding and causes that match their preferences.
SBA LoansWhile SBA loans are typically offered by traditional banks and credit unions, some online lenders may offer them, too. SBA loans are guaranteed by the U.S. Small Business Administration, making them low-risk and highly sought-after lending options. Their most popular options are the 7(a) loan programs, which offer short- and long-term financing. Since these are government-backed, they typically take longer to be approved and may have stricter eligibility requirements than non-SBA loans.
Merchant Cash AdvanceA merchant cash advance allows small businesses (“merchants”) to get a cash advance in return for a portion of their future sales or receivables, plus the factor rate. As such, these aren’t technically loans because the merchant only makes payments on what they sell, as opposed to on a set repayment schedule.
Choosing an Online Lender You Can TrustWhile many online lenders are trustworthy, you are still sharing personal, business, and financial information that you want to make sure is being used responsibly. Additionally, you want assurance that you will be treated fairly throughout the online business loan process. The following tips may help you decipher which online lenders are the most credible.
- Make sure they are registered in your state: All lenders are required to register to do business in their respective states. Contact your state’s Attorney General’s office, or banking/financial regulation department to confirm the lender you’re considering is legal and legitimate.
- Look for well-known lenders: A good place to begin your search is with lenders you’ve heard of and who come highly recommended. Their reliance on reputation often leads to more credible practices.
- Read their Better Business Bureau (BBB) rating: Whether you’re familiar with a lender or not, it’s a good idea to check their BBB rating before applying for a business loan online. You can view any past complaints and get a good idea of what their reputation is.
- Read customer reviews: Customer and expert reviews can be a great resource when you’re comparing online lenders. If you’re trying to choose between similar lenders, reviews may help you come to a final decision. Before applying for an online business loan, make sure you’ve thoroughly read through different lender reviews.
- Check for media presence: Check if the lender has received media attention in the past, and if so, what it was for. If an online small business lender receives repeated bad press, it may be wise to search for another.
- Do they support the Small Business Borrowers’ Bill of Rights?: Some lenders choose to abide by the Small Business Borrowers’ Bill of Rights. You can check if a lender is a signatory to see if they ascribe to these fair lending practices.
Possible Red FlagsIf you come across an online lender that seems too good to be true, your instincts might be right. Here are a few red flags to be aware of when you’re comparing small business lenders online:
- They don’t ask for your credit history: Very rarely will you come across a potential lender who doesn’t ask for your personal and/or credit scores during the application process.
- They offer you a loan over the phone. It’s illegal for lenders to do business (offer loans or credit and ask you to pay for it) over the phone.
- Their name is deceivingly similar to that of another lender: Scam lenders may try to confuse applicants by using copy-cat names that sound similar to legitimate online lenders.
- They tell you to pay via money order or wire transfer: It can be difficult to track and recoup money transferred over a wire or with a money order, which make these preferred payment methods for illegitimate lenders.
- They tell you to pay an individual: Trustworthy lenders will not ask you to pay an individual person. You should be making payments to the lending institution; even in the case of P2P loans, the payments are done through the lending network provider.
Applying for an Online Business Loan One of the many benefits of online business loans is how easy it is to apply. Depending on the type of financing and lender, you can apply in as little as a few minutes. Before applying, make sure you’ve done thorough research and prepare the following documents in case a lender requires them:
Whether you’re looking for a short-term business loan, loan for bad credit, or an SBA loan, Lantern Credit is ready to help you find the right lender for your business needs. By filling out our simple online form, you’ll be able to compare trusted, online lenders with ease in minutes. By spending less time searching for the right financing, you can spend more time helping your business grow.
- Personal and business credit ratings
- Personal and business tax returns for the previous 1 to 2 years
- Business bank account statements
- Profit and loss statements
- Identifying documents like a government issued ID
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website on credit (https://www.consumer.ftc.gov/topics/credit-and-loans)SOLC20058
About the Author
Lantern is a product comparison site that makes it easy for individuals to shop for products and compare offers with top lenders. Lantern is owned and operated by SoFi Lending Corp., the digital personal finance company that has helped over one million people get their money right.