Online Business Loans: What Are They, Where To Find Them & How To Apply
Small businesses might look to online lenders for funding, and while the loans are fast and can accommodate almost any business, rates can be high. Are they right for you?
How is an online business loan different from any other business loan? Chances are, if you’ve been searching for business loans, you’ve come across the term.
According to the most recent Small Business Credit Survey conducted by the Federal Reserve Banks, the share of small business loan applicants receiving funding from traditional lending sources fell from 51% in 2019 to 30% in 2021. While some of this can be attributed to declining application rates (43% in 2019, down to 36% in 2021), approval rates have also decreased from 45% in 2020 to 38% in 2021.
Below, we’ll discuss what online business loans are, and how they can play an important role in closing the funding gap for small businesses. Read on, or check out:
- Our top picks for small business loans
- Our guide to loans for startup businesses with bad credit
- How to get matched with the right online business loan
Table of Contents
What Are Online Business Loans?
Online business loans are loans whose application processes are completed through the internet. Additionally, the phrase is generally associated with non-bank lenders.
Often, the entire process can be completed online through secure portals, though how automated the process is may vary from lender to lender. You may be contacted by a representative by phone for additional screening or materials. A direct deposit can be set up to receive loan funds, and many lenders offer the option to connect your bank account to make automatic payments.
How Are Online Business Loans Different From Bank Loans?
Online business loans are different from bank loans in a number of ways. Traditionally, the means of application were the main distinguishing factor; you’d have to drive to the local branch of your bank to apply for a loan. But with more banks now offering the ability to conduct some or even all of a business loan application process through online portals, the distinction may not be as clear as it was in the past.
Online business loans generally prioritize speed and ease of qualification over low-interest rates. In some cases, loans can be approved in just minutes and funded within days — or even within 24 hours. There are typically not as many documentation requirements for online business loans as bank loans. Bank loans require high revenues, strong credit scores, and often have a minimum requirement for years in business.
On the other hand, bank loans tend to offer better rates and longer repayment terms.
How Are Online Business Loans Different From Alternative Business Loans?
The terms online business loans and alternative business loans are often used interchangeably.
What are the differences between the two?
An alternative business loan is defined as a loan that is obtained from a source other than a bank. Many alternative lenders – but not all – offer online loan options.
If you want an example of how a loan can be an alternative loan without being an online loan: a loan from a credit union is an alternative loan. A loan from a microlender is also an alternative loan. While some credit unions and microlenders may have an online application process, in many cases, a borrower will have to pay an in-person visit or apply over the phone.
How To Find Online Business Loans
Online business loans can be found easily through a quick Google search. However, wading through all of the different lenders, which vary greatly in quality, can be overwhelming. Narrowing your search to reputable lenders will save you both time and grief.
You can use our resources to compare small business loans at a glance. Once you’ve found a lender (or a few) that have captured your interest, check out our in-depth small business loan reviews to learn more about rates, requirements, and navigating the application process.
A business loan should only be used to boost your business. You want to ensure your return on investment outweighs the full cost of the loan, including all fees and interest. It’s easy to fall for the idea of fast money, but you should take the time to do your research to find the most affordable loan option that meets your business needs.
Types Of Business Loans Offered Online
One of the biggest benefits of applying for an online loan is how many options are available to business owners. No matter what the money will be used for, how much is needed, or even if the borrower has some challenges that disqualify them from conventional loans, online lending offers something for everyone.
An installment loan is what most people think of when they hear the word “loan.” With an installment loan, a borrower receives a specific lump sum amount of money, such as $10,000 or $25,000. The borrower then repays the loan, plus interest, in equal payments over a set period of time. Typically, this is once per month but payment schedules may vary by lender.
Installment loans are often used to fund large, long-anticipated purchases, such as a commercial vehicle or real estate. Interest rates vary, with the lowest rates and best terms going to borrowers with the highest credit scores.
Small Business Administration (SBA) Loans
|7(a) Loans||Small business loans for many business purposes, such as working capital, business expansion, equipment, inventory, and purchasing real estate|
|Microloans||Small loans with a maximum of $50,000 that can be used for working capital, inventory, equipment, or other business projects|
|CDC/504 Loans||Large loans for acquiring fixed assets, such as real estate or equipment; 504 Loans are offered in partnership with Community Development Companies (CDCs) and banks|
|Disaster Loans||Loans used to rebuild or maintain business following a disaster|
The Small Business Administration provides many useful resources to small business owners, and one of its most popular offerings is its guaranteed loan programs.
The SBA has set the guidelines for multiple lending programs that are offered through intermediary lenders, which could include banks, credit unions, or non-profit organizations. These guidelines keep interest rates low and terms favorable for borrowers, while the SBA’s guarantee on loan proceeds protects intermediary lenders.
Available programs include 7(a) loans for a wide variety of uses (from working capital to purchase of inventory), 504 loans for commercial real estate purchases and improvements, and Microloans of up to $50,000.
Business Lines of Credit
A business line of credit allows a business to make multiple draws up to a set credit limit. Interest is charged only on the portion of the credit that has been used. A line of credit is very useful for businesses that encounter unexpected expenses or anticipate expenses of indeterminate cost.
Business lines of credit are available to borrowers with all types of credit scores, although lower scores may have higher interest rates, lower credit limits, and a need for collateral. Many lenders offer business lines of credit online, and in most cases, applications are approved within days.
A short-term loan is another popular online loan option. Short-term loans are similar to installment loans, but they are typically for much smaller amounts and will need to be paid back in a shorter period of time, which is typically one year or less. They also have flat fees rather than interest rates.
Short-term loans often have much higher interest rates than other types of loans. Businesses with lower credit scores or revenues or a short time in business may turn to short-term loans when they are unable to qualify for other types of funding.
Merchant Cash Advances
A merchant cash advance isn’t technically a loan. Instead, a funder will buy a percentage of your future credit card sales at a discount, effectively advancing you a lump sum of cash. The funder will then take a percentage of your credit card sales revenue every business day until the terms of the advance are met. Because repayments will vary based on your sales, merchant cash advances will be paid back more quickly when your sales are high, and more slowly when they’re low.
Merchant cash advances tend to have very high rates and APRS and are usually one of the more expensive ways to get financing. However, this may be an option to consider for businesses with very low credit scores or revenue, a lack of collateral, or that face other challenges when applying for other types of business loans.
Businesses that need to purchase new equipment may consider applying for an equipment loan. With this type of financing, businesses can purchase the equipment they need through affordable monthly payments instead of paying cash upfront.
Equipment loans use the equipment you’re buying as collateral, making it one of the easier types of secured loans to apply for.
Businesses that have cash flow shortages due to unpaid invoices can receive invoice financing. With this type of funding, businesses receive money immediately for unpaid invoices without having to wait for customers to pay. The accounts receivables act as the collateral with invoice financing.
Invoice factoring is one type of invoice financing. A lender pays a percentage of the invoice as a lump sum to the borrower. The lender collects payment on the invoice, and once it is paid, the remaining amount is paid to the borrower, minus fees and interest charged by the lender.
With invoice discounting, as much as 95% of the invoice total is paid to the borrower. The borrower collects the invoice total from the customer. Once collected, payment is submitted to the lender to repay the loan and pay interest and fees.
Online Business Loan Pros & Cons
Online business loans may sound great to you so far, and they do have many benefits over other types of loans. However, they also come with their own set of drawbacks. Before diving into an online application, it’s important to understand these pros and cons to determine if an online loan is the financing route you want to take.
- Fast application process: For some loans, approvals are instant and money can be in your bank account in just a few days.
- Easy application process: With online loans, documentation requirements are not as strict and all paperwork can be submitted quickly online.
- Many lending options: It’s easy to find a lending product appropriate to your needs.
- Can accommodate almost any business: Whether it’s a credit issue or cash flow challenges, business owners can overcome their financing hurdles with online loans.
- Expensive: Online loans are usually more expensive than comparable bank loans.
- Fast repayment times: You may have less time to pay the loan back and be expected to make more frequent payments
- Beware hidden fees: Some online lenders may pile on poorly disclosed fees. Stick with transparent, reputable online lenders to avoid this.
How To Apply For Online Business Loans
While the application process varies by lender, there are a few main steps that a borrower must take when applying for an online business loan.
Step 1: Gather Information About Your Business
You can save yourself some time by making sure you have these commonly requested materials handy:
- Legal name and business name
- Personal and business contact information
- Business tax ID
- Social Security number
- Income/revenue information
Step 2: Visit The Lender’s Website And Start Your Application
The first step is to visit the lender’s website and begin the secure application process. You’ll generally find the buttons to apply somewhere in the upper right-hand corner of a lender’s website.
Step 3: Submit Requested Information
Typically, the lender will require the applicant to submit documentation. Initial documents may include bank statements and financial statements. For larger loans, additional information and documentation may be required.
Step 4: Await Contact Or Decision
After submission, the application will go through the lender’s approval process. For certain types of loans, approval could be instant. With other loans, such as SBA loans, more time may be required. The lender may also require additional documentation or a phone call to verify the information.
In order to obtain a loan, specific collateral (business or personal assets that are used to secure the loan) may be required. Other times, specific collateral is not required. However, you might need to sign a personal guarantee or blanket lien will typically be included within the contract.
Step 5: Get Your Funds
Once the loan has been approved, the next step will be based on the lender’s funding policies. Some online lenders provide funds within days or as soon as 24 hours. All applicants should fully read and understand a loan contract before signing. Once signed, online loans are deposited directly into the borrower’s bank account. At this time, the borrower may also be able to log into their account through the lender’s website to have access to the signed loan documents and features such as autopay.
Online Business Loans FAQs
Final Thoughts: Online Business Loans
Online business loans make it easier than ever to get the money you need for your business. While these loans are great for getting fast funding, it’s important that you take the time to understand the loan process and fully review any offers you’ve received. While it’s okay to take on extra debt to advance your business, taking on debt that you don’t need or can’t afford can hurt your business in the long run.