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Updated: April 13th, 2020
There are a myriad financing solutions for business owners who want to grow their operations; one of the best options, however, is getting a loan with an online small business lender.
Online lending can provide fast, affordable financing, but it’s not as well known as some of the more traditional financing options. To figure out if an online business loan is right for you, it’s crucial to do your homework.
Below, we’ve compiled a list of the most frequently asked questions about online small business loans, so you can study up and see what works best for your operation.
Traditional lending refers to bank loans or loans backed by the Small Business Administration. Online lending, on the other hand, can take many forms, but it generally refers to marketplace lending, which connects small business owners looking for capital with investors who want to provide it.
It can be tough to get a loan from a traditional lender; not only is the application process more tedious, the qualification requirements are more rigid. Online small business lenders, however, pride themselves on giving business owners easier access to financing, and tend to offer more flexibility with lending terms.
Plus, because online lenders use advanced programs that help expedite the underwriting process, you can usually get a decision on your online business loan application within days — and sometimes even hours. With a bank loan, though, you often have to wait up to three months to receive a response.
With an online business loan, you can put your funds toward any initiative or purchase that’ll help your business grow and thrive. That includes relocation, expansion, building renovations, hiring, refinancing credit card debt, purchasing inventory and equipment, or paying bills.
When you’re a sole proprietor, it’s far easier applying for a business loan through an online lender than a traditional lender. That’s because most banks require their loan applicants to have high business credit scores, which can be difficult for a sole proprietor. Online lenders, on the other hand, typically look at metrics beyond business credit scores.
You don’t need to have a perfect personal credit score to qualify for online small business loans. A less than stellar credit score isn’t a deal-breaker for online lenders, but you’ll need to prove your business is in good financial shape and that you have a history of making responsible repayments.
Some online lenders may require collateral depending on the particular type of loan you apply for, but others may dismiss it. At Funding Circle, for example, we’re more interested in your business’ potential than in your assets. That’s why we ask for a personal guarantee, which states that you as the business owner will be liable if your business can’t meet its payments.
Traditional lenders require you to submit detailed business plans when applying for loans, but the majority of online small business lenders rely on other methods of assessing your business’ growth potential. For your own records, though, it’s still a good idea to write up a basic description explaining why you need extra capital, what you plan to use it for, and how you think the additional funds will contribute to your business’ success.
The requirements for paperwork vary depending on the particular lender and type of online small business loan, but you usually only need a handful of documents, including your credit score, tax returns, and bank statements.
Applying for a business loan online is fairly straightforward. At Funding Circle, the application process takes just 10 minutes. You simply enter your personal information, upload a few documents, and click submit.
Online lenders value speed, so you usually hear back within days — or hours — of submitting an online business loan application. When you apply with Funding Circle, you can get a decision in just 24 hours after submitting your documents, and have funds in your account in as a few as five business days if you’re approved.
Every lending platform is different, but most online lenders take into account two primary factors: the current state of your business and your business’ profit potential. At Funding Circle, we look for businesses with positive cash flow, consistent sales or revenue, a healthy base of customers or clients, and a history of prompt repayments. However, we also review cash flow projections to see how your business might bloom in the near future and take into account whether or not you regularly put money toward growing your business.
Borrowing amounts vary depending on the lender. You may be able to get an online business loan for as little as $5,000 to cover a one-off purchase, or potentially secure financing for 10 times that amount. The average lending amount for alternative online small business lenders is between $60,000 and $80,000, but Funding Circle term loans let you borrow with flexible terms.
Your interest rate depends on a handful of factors, like your credit score, the type of loan you apply for, the term length, and whether or not your loan is unsecured or secured by assets. The average APR for online lenders is between 10-30%, depending on the lender and loan. Merchant cash advances and short-term loans, for example, often have APRs as high as 70%, while long-term loans offer more reasonable rates. At Funding Circle, we offer fixed interest rates, with the most creditworthy applicants receiving rates that match most bank loans.
Depending on the particular online lender and loan you apply for, you may have monthly fees, origination fees, or prepayment fees. At Funding Circle, however, there are no hidden fees — just a simple one-time origination fee between 3.49-7.99% of your loan. And there are no prepayment penalties ever, so you only pay interest on the time you borrow.
Similar to borrowing amounts and interest rates, term lengths differ depending on the online small business lender and specific loan you apply for. In general, though, online lenders are more flexible with term lengths than traditional banking institutions. With Funding Circle term loans, you can borrow for a period of six months to five years.
Start by reviewing your current financials — including your credit score, profit and loss statements, and cash flow — to see where you’re at. Next, write down your goals and identify any problem areas in your business. Are you struggling to buy enough inventory to keep up with customer demand, for example? Or maybe you want more capital to expand your product line or open a second store within the next year. Once you know what you need, you can better determine which type of online small business loan is right for your operation.
If you need help carrying out your business’ growth plans, consider applying for a business loan online. Start by checking out Funding Circle’s term loans. Our loans were designed for small business owners by small business owners. Learn more about us or see how we compare to other lenders.
Paige Smith is a Content Marketing Writer and Senior Contributing Writer at Funding Circle. She has a bachelor's degree in English Literature from Cal Poly San Luis Obispo, and specializes in writing about the intersection of business, finance, and tech. Paige has written for a number of B2B industry leaders, including fintech companies, small business lenders, and business credit resource sites.