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Online loans vs bank loans: How to decide what’s best for your business

Why Funding Circle?

Online loans vs bank loans: How to decide what’s best for your business

Updated: August 3rd, 2023

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There’s no shortage of financing options for business owners who need capital, but most of them fall into one of two categories: bank loans or loans from online lenders

In 2020, 42% of small business owners applied for a loan at a large bank, 43% applied with a small bank, and 20% applied with an online lender, according to the Federal Reserve’s 2021 Small Business Credit Survey. Both types of lenders come with unique benefits and risks, so it’s important to figure out which one works best for you. 

Banks vs. online lenders

To help you make the right decision for your business, let’s explore some of the differences between brick-and-mortar banks and online lenders. 

Types of business loans and their uses

Banks tend to offer a wide variety of business financing solutions—from long-term loans and lines of credit to short-term loans and business credit cards. You can also partner with a bank to open business checking and savings accounts. 

Online lenders, on the other hand, tend to specialize in one or two types of business loan products. Some offer merchant cash advances, equipment financing, term loans, lines of credit, or invoice factoring—or a combination of those. At Funding Circle, we offer curated business term loans, business lines of credit, and SBA 7(a) loans, but the majority of borrowers come to us for our fast and affordable long-term business loans. 

With both banks and online lenders, you can generally use your funds for a variety of purposes, including debt refinancing, real estate investments, inventory purchases, and working capital needs. 

Business loan Eligibility Requirements

Whether or not you’re eligible for funds depends less on the lender you’re applying with and more on the type of financing you’re seeking. In general, though, banks have higher standards for qualifications. 

Most large banks require applicants to have credit scores of 680 or higher, at least two years of operating history, and annual revenues above $250,000. Many banks also want to know that your business is profitable and competitive. 

Online lenders also look at your personal and business scores to determine eligibility, but they typically have looser requirements. The average alternative lender looks for a credit score of at least 600, at least six months of operating history, and an annual revenue of $100,000. 

Business Loan Application Process 

Though many banks are starting to embrace digitization, online lenders tend to have the fastest and most accessible application processes. With many online lenders, not only can you check to see what rates you qualify for without impacting your credit score, you can also fill out forms and upload documents straight from your mobile device or tablet.  

Applying for a bank loan often requires scheduling a phone consultation and submitting a lot of paperwork (including a fully fleshed-out business plan), but online lenders usually only need a few different documents to get started. At Funding Circle, we ask for two years of business tax returns, one year of personal tax returns, and six months of bank statements—and applying takes just six minutes. 

Underwriting and loan approval processes

The underwriting and approval processes are where banks and online lenders diverge significantly. Banks tend to have lengthier turnaround times, ranging from two weeks to several months just for an initial response. From there, many banks require follow-up conversations and additional documentation before reaching a decision.  

Meanwhile, online lenders are built with speed and efficiency in mind. Most online lenders use technology to expedite the underwriting process, so you can get a decision on your application within days—or hours. At Funding Circle, our team of expert underwriters uses advanced underwriting software to speed things along. You can get a decision from us in as little as 24 hours, and get funds in as few as three days. 

Business loan amount, terms, and rates

Because banks have more rigid qualifications for creditworthiness, they can usually offer business owners higher borrowing amounts, longer repayment periods, and lower interest rates. The average small business loan amount from a large bank is just under $600,000; for an online lender, the average amount ranges from $50,000 to $80,000. The average APR for a bank loan is 3-7%, and 11-44% for an online term loan. 

For a Funding Circle term loan, you can borrow anywhere from $25,000 to $500,000 if you’re approved, and qualify for a repayment term between six months and five years. 

Collateral, personal guarantees, and loan penalties

Bank loans typically require you to secure your loan by putting up an asset—like your office building or savings—as collateral. Online lenders don’t always require collateral, but many do ask for a personal guarantee, which means personal assets like your house or car are on the line if you default on your loan. 

Loans from any lender can come with a handful of different fees—from application fees to prepayment penalties—so it’s crucial to do your research. With Funding Circle loans, there are no application fees, administration or servicing fees, or penalties for paying off your loan; you just have to pay a one-time origination fee. 

Online lender customer service vs. bank customer service 

A brick-and-mortar bank gives you the option of visiting in person to ask questions or get help. Plus, many banking institutions also offer legacy services and special offers to longtime customers. 

With online lenders, the financing process tends to be more independent; much of the customer support you receive is through online channels like web messaging, email, and phone calls. However, some online lenders pride themselves on personalized customer service. 

At Funding Circle, we set you up with a dedicated Account Manager who’ll reach out after you submit your loan application. They’ll get to know you and your business, answer any questions you have, then walk you through the rest of the loan process. 

Online lenderBank
You can apply fast and get funds faster than a bank. The qualification requirements are less rigid. Many have a pre-qualification tool that lets you check your rates without damaging your credit score. 

Interest rates are higher. There’s no option for in-person service. 

You can get lower interest rates and larger borrowing amounts.You get in-person service, and can  develop a relationship with the bank to qualify for offers and opportunities. 

The application process generally requires more paperwork. You need a higher credit score and proof of profitability to qualify. You may not get funds quickly. 

How to decide between a bank and an online lender

The lender that’s right for you depends on your funding needs, goals, and business financials. To figure out whether to apply for a bank loan or online lender, ask yourself the following questions: 

  • What are your funding needs? If you need a large sum of money (upward of $500,000), a bank is probably your best bet. 
  • What’s your credit score? If you haven’t had the opportunity to build business credit yet, you may have more success qualifying for a loan with an online lender. 
  • What are your business financials like? Banks want to see strong cash flow, higher annual revenues, and proof of profitability, but online lenders tend to be more lenient. 
  • What’s your timeline? If you can afford to wait a couple of months for funding, you might score better interest rates with a bank loan. However, if you need capital in a matter of days—to cover upfront costs, for example, or seize an exciting opportunity—an online lender will get you cash faster. 

Banks are good options if:

  • You have excellent credit and could qualify for a lower interest rate. 
  • You need a large amount of capital. 
  • You have a preexisting relationship with your bank. 
  • You value in-person customer service. 

Online lenders are good options if:

  • You don’t have excellent credit yet. 
  • You’re a relatively new business without a history of profit or high revenue. 
  • You need funds fast. 
  • You like the convenience of applying online. 
  • You want more flexibility. 

At Funding Circle, we’re here to help you reach your business goals. When you apply for financing with us, you get flexible terms, fast responses, and personalized guidance. To learn more about what we offer, check out our business term loans or read our FAQs


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