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Running a business takes a lot of commitment, hard work, and resilience. One of the things that holds many people back from taking the jump into business ownership, or growing their business, is financing. Figuring out how you’re going to fund your new venture, or business expansion, is no easy task. Many entrepreneurs initially start with asking for money from friends and family, which isn’t a horrible way to get started, assuming you’re comfortable with the potential risk to your relationship if things go bad. If you’re not prepared for that risk, or if you don’t have the luxury of wealthy friends and family, all is not lost. There are many options when it comes to business financing, including traditional bank loans, as well as other types of online business loans. Which loan type is best for you will depend on many factors relating to your personal situation, as well as your business.
Let’s look at some of the differences between online business loans and traditional bank loans:
When seeking a traditional business loan from a bank, they typically will require that you have a good credit history. Without it, your application is likely to get rejected straight away. Depending on the online business loan provider, though, your credit history could be less of an issue. Now, it most certainly will result in less favorable terms, but at least might not rule you out entirely. The online lenders tend to be more lenient on things, so it’s still worth trying even with damaged credit
If you’re going to need a large amount of money for your business, then you’re probably going to be looking for a bank loan, or bringing on equity investment. If you only need a small amount of money, though, then online lenders are likely your best bet. Many of the online lenders specialize in these smaller loans, as for them it’s a numbers game. They’ll process thousands of them, so each one makes up a very small portion of their portfolio.
If you need a loan right away, an online loan is likely your best option. Online lenders specialize in speedy transactions, relying on technology to maximize efficiency. As we talked about in the last point, for online lenders these loans are a numbers game – they want to process as many as they can. Since much of the process is automated, they can have extremely quick funding. Some can have money in your account the same day, or next day. With a bank, it’s going to be a much longer and laborious process. If you’re applying for an SBA backed loan, that also adds additional complexity as well. Since the loan amounts tend to be larger, it also makes sense that they are going to look much more in depth into your and your business to ensure they are making a good lending decision.
Generally speaking, the interest for bank loans is lower than that for online lenders. The online lenders are taking more risk, with looser guidelines, so they have to price that risk in. Plus, since they are typically looking at shorter terms, and smaller amounts, they have to complete a lot more transactions to make the business function. In addition, many of the bank loans will be backed by the SBA, which lowers the bank’s risk substantially.
Small vs. large business
Online business lenders tend to specialize in smaller companies. Since the loans are so much smaller than average bank loans, they have to do a lot of loans to make money – that’s their business model. Banks are looking for larger businesses that they can build relationships with. With that in mind, if you’re a very small company, you’ll likely be best served finding an online lender to work with. Larger companies, looking for more money, will want to look towards the more traditional bank programs.
Figuring out which business lender to go with isn’t always easy, but hopefully this helped point you in the right direction. More and more banks are starting to adopt some of the practices from online lenders as well, so over time the two will likely merge together. In the meantime, though, remember that there are lots of options for small businesses seeking capital. Don’t give up just because one lender says no – there is always another lender out there.