Small businesses have historically struggled to qualify for loans from banks due to their more stringent requirements. As a result, online lenders have become popular alternatives to help fill this funding gap. Though traditional lenders and online lenders offer similar products, their application and funding processes are vastly different. Small business owners should consider all their options before making any financing decisions.
The stricter requirements of traditional lenders make it difficult for small businesses to qualify for their products. For example, business owners and businesses need to have good to excellent credit scores, which is a FICO score of 700 or more, and businesses typically need to be at least 2 years old. In contrast, some online lenders such as Bizfi and BlueVine only require three months in business to qualify for their financing products. Revenue minimums and credit score requirements are also much lower for online lenders, with some lenders, such as Kabbage, requiring no credit score minimum.
Banks also require significantly more paperwork than online lenders. This includes detailed business plans with financial data, business summaries and investment information. Traditional lenders also require personal and business income tax returns, legal documents and other personal information. While you might have to provide similar paperwork to certain online lenders, most require less documentation. Some alternative lenders only require that you link other online banking or financial accounts during the application process. For instance, to qualify for Fundbox invoice factoring, you must use an online accounting service for at least six months and link this account to Fundbox.
Another difference between online lenders and traditional lenders is the amount of time it takes for borrowers to receive an approval decision and funds. Banks can take anywhere from a few weeks to a few months to notify you of their decision, let alone give you the funds you need. This can be especially frustrating for small businesses that need capital immediately to cover daily expenses or invest in necessary equipment. In contrast, online lenders can give you a decision in as fast as one business day, and sometimes, they can deposit your funds just as quickly.
One of the biggest downfalls of online lenders are their higher APRs. Despite more lenient requirements and faster funding times, some APRs can be well over 90%. In contrast, banks can provide single digit rates to qualified borrowers. While some alternative lenders such as OnDeck also offer single digit APRs, only established businesses with excellent credit scores will likely qualify for these rates.
The Bottom Line
Online lenders can be a good option for small businesses that have been unable to qualify for a loan from a traditional lender. However, there is less regulation in the online lending industry, meaning that small business owners can fall prey to predatory lending practices. Banks can provide the funds you need at lower rates (typically), but you’ll have to wait much longer and you’ll need stronger credentials to qualify. Before you make a decision about where to borrow funds for your small business, make sure that you compare your options.
The article The Biggest Differences Between Traditional Lenders and Online Lenders originally appeared on ValuePenguin.