Many online lenders aren't banks in the traditional sense, but instead offer “alternative” financing. For example, an online lender might offer cash advances and invoice financing. Further, online lenders are often willing to work with businesses that traditional banks have shied away from. Many “bankable” clients are now working with online lenders as well. Why? Online loans are generally easier to apply for and financing is available faster than traditional bank funding. Due to this, small businesses that would easily qualify for traditional bank loans often choose online lenders instead. In this blog post, we'll explain everything you need to know about online business loan programs. Specifically, we'll review their benefits, downsides, and how the loan application process typically works.
The Pros of Online LendersObtaining an online business loan comes with many advantages, including:
- Application process that requires less documentation and can be completed anytime.
- Quick response (often 1 business day or less)
- Funds are generally distributed more quickly; often, they are sent to the applicants’ bank account within days.
- Lenders may be willing to work with new businesses or those with poor credit scores.
The Cons of Online LendersWhile obtaining an online business loan comes with many advantages, there are some drawbacks, including:
- The plethora of funding options can be overwhelming.
- Loan scams are prevalent on the Internet
- In some cases, online business loans come with higher Interest rates in comparison to other funding options.
Different Online Business Loan OptionsOnline lenders offer a variety of financing options including term loans, lines of credit, cash advances, and invoice financing. Each of these financing options provides its own unique advantages. We’ll examine a few popular options so you can select the online financing option that’s right for you.
Term LoansTerm loans require regular, fixed payments and interest is charged in exchange for financing. Typically, term loans are considered “traditional” loans.
The Benefits of Term Loans:
- Streamlined application process.
- Often affordable interest rates.
- Not required to surrender equity or sales.
The Downsides of Term Loans:
- Application process usually requires considerable documentation
- Little to no flexibility in payments.
Business Lines of CreditA line of credit is very similar to a business credit card. Once you receive a credit line, your business will be provided with a credit limit. Then, you can draw funds as needed until the limit is reached.
The Benefits of Business Credit Lines:
- Offers quick and easy access to cash (once approved).
- Provides financial flexibility.
- Flexible repayment terms
- Pay interest only on withdrawn loan amount.
The Downsides of Business Credit Lines:
- May have to pay annual fees.
- Need to monitor variable interest rates
Merchant Cash AdvancesWith a cash advance, you’ll sell a portion of your future credit card earnings in exchange for immediate funding.
The Benefits of Cash Advances:
- Remittance is flexible, as it is based on your earnings.
- Considered easy to qualify for
- No upfront collateral required.
The Downsides of Cash Advances:
- Total costs can be higher than traditional financing options.
- Will reduce future earnings, as you'll remit a percentage of your future credit card sales to fulfill your financial obligations.
Invoice FinancingAccounts receivable financing is like a cash advance in that you aren’t receiving a loan, but instead selling an asset. In this case, you’ll sell invoices in exchange for additional working capital.
The Benefits of Invoice Financing:
- No need for collateral.
- Lender assumes risk of collecting receivables.
- Upfront collateral isn’t required
The Downsides of Invoice Financing:
- Total costs can be higher than more traditional financing options.
- Will reduce future earnings
The Online Business Loan Application ProcessThe online application process will vary from lender to lender. The process will also be different for each financing option. Invoice Financing, for example, will require you to submit invoices. For a cash advance, the lender will require credit card receipts. You'll typically need to provide the following information:
- Collect relevant documentation, including Profit/Loss sheets, income statements, and documented expenses.
- Find your business license
- Obtain a copy of your business lease and/or title for property.
- Organize your bank statements from the last three months.
- Gather your personal financial information, including your income tax returns.
- Examine a variety of lender websites and review the terms and conditions.