According to a 2012 study by the Harvard Business School, about 62 million people work in a small business. That's approximately half of the private sector workforce in the United States.
Clearly, small businesses are vital to our nation's economic success. Yet, the Great Recession of 2007 hit them especially hard. Sources of credit financing dried up because of struggling banks. Small businesses still have trouble securing loans from the big banks today.
To fill this gap, a group of alternative or online lenders stepped in. Small business loans online provide a way for small business owners to obtain much-needed funding quickly and easily.
As a small business owner, you may be thinking of applying for an online loan. If so, what do you need to know in 2018?
Read on for our guide below!
A Little Introduction
Financing can be a significant challenge for every entrepreneur. Most small business owners use their own personal capital to launch their company. Later sources of cash might still come from personal investment.
But if that is not sufficient, a business owner needs to look elsewhere for funding. In fact, businesses need capital to take care of many growth-related factors to be successful. These might include:
- expanding the business
- financing new technology
- purchasing new, additional inventory or equipment
- hiring new employees
Luckily, small business owners have many choices when it comes to a loan. Everything from traditional banks to crowdfunding to online loans is an option.
In fact, now might be the best time since the Great Recession to get a loan. The economy has improved significantly, and there has been a large increase in competition.
Unfortunately, though, small business owners still have a hard time getting a loan from a big bank. Small businesses have a smaller sales volume than larger organizations. They also have more modest cash reserves.
Businesses with poor credit or a lack of collateral have an even harder time. For these reasons, online lenders today provide loans to about 20% of small businesses requesting a loan. This is a remarkable figure, given the newness of the industry.
Why Small Business Loans Online?
Of course, stringent bank requirements are a significant factor in the growth of online lending. But the explosion of the industry comes from three other factors as well:
- easy, user-friendly online applications
- fast loan underwriting
- emphasis on customer service
Online lenders work directly with small business owners. Their approval requirements are not as strict as those of a bank. Small business loans online are also attractive because you don't have to wait months for your cash. Applications can often be processed in a day or two.
Online loan decisions are more efficient and lenient than those from a bank. These loans are also appropriate for emergency situations. If your business depends on access to capital now, you can't wait months for a bank loan.
How Does This All Work Anyway?
There are two kinds of small business loans online. They are peer-to-peer financing and direct.
With peer-to-peer financing, there isn't a financial institution. Instead, the borrower is connected to individual investors. They generally fund small parts of a more diversified portfolio.
There is an increased risk for the lender in peer-to-peer financing. Because of this fact, interest rates tend to be high, although lending criteria are more indulgent.
The second kind of small business loans online comes from direct lenders. These loans are funded by the companies' own capital, not individual investors. In this way, direct lenders are like traditional banks.
No brokers or other middlemen are involved in the loan process. For all these reasons, you are able to get your loan more quickly than with peer-to-peer funding.
The type of online loan you choose will depend on your credit rating as well as the size of your business.
Alternative lenders offer several different types of online loans. Let's explore some of them below!
Working Capital Loan
A working capital loan is used to cover everyday operational costs. These can include items like rent, payroll, and inventory.
Working capital loans benefit companies that have high seasonality or cyclical sales cycles. For example, retail stores are often dependent on holiday sales. They may need a working capital loan at other times of the year to pull through.
There are other reasons why a small business might need a working capital loan. Some of these include sudden growth, a new business opportunity, or the need for an emergency fund.
Through online lending, small business owners can apply for and receive working capital loans quickly. This allows them to fill in any cash flow gaps before they become problematic.
Business Lines of Credit
A business line of credit works in the same way as a credit card. You are approved to borrow up to a certain amount of money, but you pay interest only on what you actually take out.
This kind of loan provides great flexibility. It is much freer than a traditional term loan, where you receive the lump sum and pay interest on the total. With a term loan, it doesn't matter if you use the money or not, you are still going to pay interest on it.
Equipment financing sounds like what it is: a loan to purchase a new piece of equipment or machinery for your business. It can help spread out the cost of expensive hardware, and many online lenders allow you to either finance or lease your equipment.
Invoice financing works well for small businesses that have cash stuck in unpaid invoices. With this type of loan, you use your unpaid invoices as collateral and receive money upfront.
With invoice financing, you still personally collect money from your customers. People often confuse this type of loan with invoice factoring. That's where you sell your invoices altogether and no longer deal directly with your customers.
Merchant Cash Advances
A merchant cash advance (MCA) is not really a loan. Rather they occur when the business owner sells a portion of future credit card receipts in exchange for immediate cash.
An MCA can be used to cover short-term expenses or cash flow, but it can be costly. MCA fees tend to be quite high. For this reason, many small businesses prefer short-term loans.
Commercial Mortgage Loan
A commercial mortgage loan is used to purchase, renovate, or refinance commercial real estate. Unless you work in your home, you are going to need an office or warehouse for your business.
Only a small number of online lenders allow their loans to be used for buying property, though. Choices are even more limited if your credit score is low.
Franchise loans assist business owners purchase or expand a franchise. Traditional lenders such as banks are the go-to sources for initial funding. But online lenders can help with:
- expenses such as purchasing equipment
- getting through seasonal fluctuations in revenues
- opening another location after the franchise is up-and-running
Some online lenders require the franchise to have existed for a year or two in order to apply for the loan.
The small business loans online industry has quickly filled in the lending holes left by traditional banks. Small business owners can apply for many of the same loans that traditional banks offer without all the hassles and long waits.
Online lending can also be a boon for anyone with an emergency cash flow situation. It doesn't matter if the crisis emerged from poor planning or unexpected growth. Quick access to cash can help save your business.
We are happy to work with you to meet your financing needs. Feel free to contact us about our loan services. We will help you every step of the way!