Since the financial crisis, banks have been cutting back on small business financing. As it became difficult for small businesses to get access to traditional loans, online lenders sprung up to fill the need for cash flow and credit. However, the question here is what should you go for your small business? We perform an in depth evaluation of application process, terms and requirements, security, reputation, and government backing for traditional loans and online small business loans so you can make the best decision on your small business’ borrowing requirements.
Let’s take a look at the pros and cons of both online business loans and traditional business loans:
Online Business Loans
- Quick approval process
- Borrow smaller for shorter periods
- More flexibility with loan requirements
- Quick and easy application process
- Funding to businesses with less than perfect credit score
- Easier to acquire unsecured loan
- Maximum loan amount is capped
- Higher APR than traditional sources
- No independent regulatory monitoring
- Risk of having your information hacked online
- Difficult to access government financial assistance
Traditional Bank Loans
- Borrow larger amounts
- Lower APR rates with better loan terms
- Banks are regulated by independent authorities
- Several compliance and best practice regulations
- Easy access to government-backed loans such as SBA loans
- Approval process can take several weeks
- Strict loan requirements
- Difficult to qualify for an unsecured loan
- You need to have perfect credit
- Application process is long drawn-out, difficult, and timewasting
- Difficult to acquire small amounts
How Much Time It Will Take?
Getting a small business loan from a bank normally takes a long time. You will need to visit your bank physically, offer a lot of documentation and wait even as the bank considers your application. It could take several weeks for the funding to come through from a bank. Online lenders are able to use Fintech platforms to automate the process. With advanced algorithms and a more flexible approval process, some online lenders can offer funding within 48 hours.
How Much Amount I Can Borrow?
In case a company is looking to borrow a large amount, banks are the best source as compared to online lenders. Banks are normally able to offer a larger loan amounts than online lenders – as long as your small business is able to qualify for the loan. It is not only about the maximum amount. Small businesses frequently find it difficult to borrow small amounts from banks, which includes enough to cover more products for the holiday season. Online lenders have a greater flexibility to provide small loans of only some hundred bucks.
What are the Requirements for Loan?
In terms of the loan requirements, banks are more stringent as compared to online lenders. They typically ask applicants to show many years of business operations, making it very challenging for newer businesses and startups to acquire a line of credit or an essential small business loan to get things started. Small businesses that have been in business for at least six months can find favorable terms with online lenders; however would struggle to qualify for a traditional loan. Another difference is that online lenders are more inclined to provide unsecured loans which banks try to avoid. Banks are historically unfavorable to unsecured loans and typically insist on several figures worth of equipment, or real estate to support the loan. Banks also demand that businesses offer a much higher average annual revenue.
What are the Loan Terms?
Even though it’s difficult to qualify for a bank business loan, the terms they offer to businesses that flourish are normally more favorable as compared to those available through online lending firms. As they only take on established companies that have a less default risk, banks can offer lower interest rates, more flexible and longer repayment terms as compared to online lenders. In contrast, online lenders want to balance the risk that a number of their borrowers will not be able to pay and they don’t have any valuable thing to set as collateral against the loan. They will be susceptible to charge higher APR and shorter repayment terms.
How Simple is the Loan Application Process?
The loan application process for a bank loan is long and often complicated. One normally has to apply personally and defend his objectives for the loan to a bank. Banks require more paperwork as compared to online lenders before they will give a second look to your application.
In contrast, small businesses can prequalify for a loan from an alternative lender in only a couple of minutes through online process. Online small business loans have short application process that normally take 4-5 minutes to complete. Even online lenders do require some or all the same paperwork as a bank before making any loan. The major difference between online and traditional lenders is that online lenders have pre-approved you through their earlier quick application manner and on the other hand, in traditional settings, you need to wait for weeks for the approval of the loan.