Nobody doubts that the online marketplace for all sorts of commercial loans has grown rapidly. According to The Wall Street Journal, these internet- and technology-based lenders have doubled their outstanding loans since 2000. In 2014, for example, online lenders offered $7 billion in financing. At the same time, this substantial amount of money still doesn't match the business lending portfolios of the traditional banking industry. Of course, online lenders operate in a very new niche, and some traditional lenders have been established for centuries. From a business owner's perspective, is it best to seek traditional financing or try one of these tech-based alternative lenders?
Small business owners may not and probably should not care which kind of lender does the most business. Business owners want to know which funding source offers them access to funding with transparent, reasonable rates and terms. Some companies may also require convenience, quick responses, and approvals when they don't have established credit. As with other management decisions, the source of business funding needs to get researched in light of the unique needs of each company.
Business owners who have managed to build a strong credit score may find that banks can still offer them the lowest rates. Typical applicants should be prepared to wait some weeks to get their applications approved and actually see funding arrive in their company account. The Small Business Administration has some programs in place to partially back loans. The companies that can qualify for these programs may enjoy a higher success rate for getting approved and more favourable terms. At the same time, most of these programs require companies to already have established a track record, so they aren't accessible to everybody.
Typically, companies must produce documentation of good credit, demonstrate some success after being in business for a few years, and also have some owner's equity in a company in order to qualify. Typically, banks look for personal credit scores between 700 and 800. However, banks can offer good loan terms and rates for those lenders who can get them. Startups, companies in certain industries, and businesses that have just never established their own credit before might struggle to qualify with either the SBA or at a bank. Some progressive programs have recently been released to appeal more to startups and companies that need expedited loan processing, but these generally limit the size of loans and still may take weeks to process and fund.
Can loans from online lenders offer some companies a good alternative to traditional sources of business financing? Online loan companies vary. Some offer loans from institutions and others focus on matching up borrowers with individual investors. They are similar in that they rely upon financial technology, now called fintech, to qualify applicants and provide funding. This technology allows these companies to work very efficiently and offer more flexible solutions than traditional loan sources.
For example, online lenders may approve loans based upon a variety of different factors that can prove legitimacy - and not just a company's credit score. Just as important to many businesses who might struggle with cash flow or need funding for a new opportunity, these online lenders can act quickly. Applicants may apply online and watch their loans progress from an application to funding within a matter of days.
An online line of credit can be drawn upon as the business needs financing, so the borrower doesn't have to go through the application process again. This flexibility allows the borrower to only pay fees on the money they do accept but enjoy the peace of mind of knowing they can access more cash later. These credit lines could range from a few thousand to as much as a hundred thousand dollars. Accessing this line of credit is as simple as requesting it, and it might show up in the borrower's account as quickly as the next day.
The best online lenders have very transparent fees and terms, so borrowers know exactly how much they need to pay back and when they need to make payments. As with most other types of loans, fees may depend upon the lender's assessment of the borrower's creditworthiness. There has been some news about online lenders charging high fees. Since these platforms may say yes to borrowers that traditional business lenders would decline as high risks, this flexibility can skew the averages.
Businesses that have the time, documentation, equity, and credit scores to qualify for a traditional loan may benefit from low rates and good payment terms. Yes, it's true that banks may offer very good loans for those companies that can get them - and can wait for their loan to get processed and funded. Small, online, and startup companies may not have had the chance to build credit in the company’s name, and they also might need funding more urgently, either to manage the cost of normal operations or to seize a golden opportunity to increase profits. In these situations, an online lending platform may offer a more convenient and flexible solution.
Obviously, there is not a convenient and one-size-fits-all solution for every company. Prudent financial managers will examine different funding sources to find the best one for their own particular needs. For some companies, a large loan with low fees in comparison might provide the right answer; for other businesses, a quick loan that can fund in days will make more sense because the lack of financing will actually cost the business money in the long run.