What is an Online Business Loan?
Any lender can put their small business loan application online. But a true online business loan usually refers to one that is processed fully online. These loans are often faster and more flexible than traditional term loans issued by banks and credit unions. With both secured and unsecured business loan options, these loans often consider other factors besides a borrower’s credit score to determine eligibility, including revenues, credit card sales, and time in business.
Just like with any type of business loan, you will either be approved for a line of credit or a term loan, which is a loan for a fixed amount. These loans may be used for a variety of purposes including working capital, to grow your business, to buy equipment or even just to smooth out cash flow. Payments will likely be automatically deducted from your business bank account.
Benefits of Online Business Loans
For many physical and online businesses, qualifying for an SBA loan or other financing from a traditional lender isn’t an option, maybe because they have low credit scores or haven’t been in business long enough. In that case, borrowing from an alternative lender could be a viable way to get working capital.
Another major benefit of online business loans is that you can apply 24/7 and usually get a decision quickly— sometimes in minutes or hours. If your application is approved, online business loans often provide funds quickly, in as little as one day.
Challenges with Online Business Loans
While online financing may open the door to getting much-needed funds for many businesses, there may also be challenges.
Much like traditional bank loans, some online lenders may require specific minimum personal credit scores. Good business credit scores aren’t typically required, though lenders may check business credit. When they do, they are usually looking for negative information on the business credit report such as tax liens or undisclosed loans. They may also check business credit to learn whether the business has numerous UCC filings.
Online business loans can, in some cases, be expensive, with high origination fees or rates that top even what business credit cards charge, so it’s important to shop around and consider all options to find the best loan for your situation.
How to Choose the Right Loan For Your Business
There are several types of online small business loans, so explore all of them to find the best fit for your needs. These include:
- Term loans
- Invoice factoring
- Unsecured and secured business loans
- Merchant cash advances
Each offers different terms and takes different factors into consideration in the application process, so it’s well worth the effort to research each for the best option.
Best Uses for Online Business Loans:
Before you apply for a term loan or line of credit with online lenders, it’s important to determine what you want to use the financing for. You might just need an injection of cash to get through a slow period, or one of these other uses:
- Working capital
- Purchasing inventory
- Purchasing equipment
- Cash flow
How an Online Business Loan is Different from Traditional Loans
Whether an online business loan is right for you depends on your business type and needs. It’s important to understand all of the small business loan options available to your business. Consider these factors before you sign on the digital dotted line of an online loan.
- Cost. Traditional business bank loans are seen as the “cream of the crop” loans because they offer some of the lowest rates on loans. Online loans generally don’t usually offer such a low cost. Annual percentage rates (APR) of 25% or more are common, but these loans are usually easier to qualify for than bank loans. (Note that in most cases small business lenders aren’t required to disclose an APR. They may use other terms to describe cost. Use the free small business loan calculators at Nav.com/calculator to understand the cost of financing.)
- Repayment schedules. While there are online business loans with a monthly repayment schedule like most bank loans, there are also many loans and types of financing (including short-term loans) that feature weekly or even daily repayment. This can affect your business’s cash flow so you’ll need to know what your repayment schedule is and how it will affect your margins and operations.
- Turnaround time. Banks are usually much slower than online lenders in processing applications. Getting a loan with the bank could take two months or more, while some online providers can underwrite a loan and approve your business in as little as a day.
- Loan use. There’s a wide variety of online business financing available with different repayment terms (short, medium, long-term) and often online loans have specific uses. Invoice factoring and financing, equipment financing, and cash flow loans are three types of financing you might consider.
Application process. Many online lenders will review your business financials. Often they do that by requiring you to link your business bank account so they can review revenues and analyze bank account activity. A business bank account may be required, and you may have trouble qualifying if you are using a personal bank account for your business.
What You Need to Know About Online Business Loans
When considering financing from online business lenders, take the pros and cons into consideration.
- Quick decision and funding
- Less effort and documentation needed
- Available for many uses
- May build business credit scores
- Higher interest rates than bank loans (as high as 99%+)
- Cost may be hard to understand
- May require good personal credit and/or business credit
- Often require a business bank account
Nav’s Verdict: Online Business Loans
Whether you’re unable to qualify for a small business loan or need a faster turnaround time in getting cash in your account, online lenders may be a good small business financing option. Applying usually takes a few minutes, and you can do it from the comfort of home. The convenience can’t be beat. By making timely payments, these loans can also help you build your business credit rating. But the cost may be higher than other options, so be sure to shop around.
Related reading: Best online business loans for bad credit
- SBA Loans
- Traditional Bank Loans
- Merchant Cash Advance
- Micro Loans
- Cash Flow Loans
- Alternative Online Loans
- Construction Business Loans
- Retail Business Loans
- Restaurant Financing Options
- SBA 7(a) Loans
- SBA Express Loans