Start shopping for a small business loan and you may soon find yourself overwhelmed. Thousands of banks and credit unions offer business financing, as do hundreds of online lenders. Where do you start?
One decision you’ll need to make is whether to apply at a bank versus an online lender. There are some very clear distinctions between the two, and those differences may help you hone in on which option is more feasible for your business.
Bank Loan vs. Online Loan
You need money fast.
An online loan is probably your best bet. Many online lenders can approve financing in minutes or hours. Some can even provide funding the same day as the loan is approved.
If you’re looking for bank funding, though, don’t expect speedy approval. A recent industry article, The Seven-Minute Loan Shakes Up Washington, revealed that banks often take weeks to approve loans because of government regulations. One financial executive quoted in that article stated that underwriting a bank loan can involve “28 separate steps.”
You want the absolute lowest rate.
Consider a bank loan. Traditional financial institutions, such as banks and credit unions, often offer the most attractive rates. Many also offer SBA-guaranteed loans, long considered the “gold standard” of small business lending due to low rates and business-friendly terms.
That doesn’t mean an online lender will always be more expensive. Some online offers are competitive. (You can’t beat a 0% loan!) But because small business lenders don’t have to disclose their costs using an Annual Percentage Rate (APR), it can be challenging to understand how much those offers really cost, and how they compare to other options.
Tip: Use Nav’s free small business loan calculators to translate loan costs to an Annual Percentage Rate (APR) that you can then compare offers.
You aren’t looking for a lot of money.
A bank probably isn’t your first choice. Banks tend to avoid smaller loans and may hand you a credit card application when you ask about one. Their definition of small may seem large to your business, and minimum loan amounts vary. But don’t be surprised if your bank doesn’t jump at the chance to lend you a couple of hundred thousand dollars. A bank’s cost of underwriting a loan for $150,000 can be just as much as underwriting one for $1.5 million — but the larger loan will be profitable and the smaller one won’t.
Some online lenders, on the other hand, will loan as little as $1000. Or they may offer smaller lines of credit you can tap as needed. And some lenders offer “microloans” of $50,000 or less. (There is an SBA microloan program as well.) Though small, these loans may be powerful if they meet your needs at the time.
Your business is new.
You will likely need to look online. Start-ups are risky and it can be tough to get funding for one. Small business lenders of all types prefer to lend to established businesses with a solid track record. Businesses that can demonstrate a couple of years of strong revenues have a better shot at getting financing.
As a general rule, banks avoid making small business loans to start-ups but that doesn’t mean you should rule it out. Some SBA loans are available to new businesses, for example. But don’t be surprised if you face hurdles getting a start-up loan for your new business
Some online lenders are more flexible than banks and will offer financing to younger businesses as long as they can demonstrate sufficient revenues. Minimum required revenues vary but at least $50,000 in annual revenue is a common threshold.
Your business is unique.
Definitely consider looking for funding online. Many entrepreneurs are innovators who find unique solutions to problems. But then they have trouble getting financing because it’s “different.” Banks in particular often lend into certain types of industries where the business model and risks are clear.
Online lenders offer a variety of ways to finance a unique business. They almost never ask to see a business plan and many are primarily interested in your business revenue. In addition, you may want to explore crowdfunding which offers the opportunity to raise money, get a loan or “pre-sell” a product. If enough people catch your vision, you may be able to get the money your business needs.
This article was originally written on January 16, 2019 and updated on October 20, 2020.