Getting a business loan can be a crucial step for entrepreneurs looking to start or grow their business. With an online business loan, you can access financing more quickly and conveniently than through traditional lending sources. In this article, we’ll explore the key steps involved in securing an online small business loan.
Understanding Online Business Loans
An online business loan provides financing for your business through an online application and approval process. Online lenders can offer fast approvals and funding in comparison to traditional bank loans.
What are Online Business Loans?
Online business loans are a type of financing offered by online lending companies and fintech firms. They provide small business owners access to capital through a quick and easy online application process. These loans are processed and funded rapidly using technology and algorithms to evaluate risk.
Key features of online business loans include:
- Online application and documentation submission
- Automated approval decisions
- Funding in as fast as 24-48 hours
- Fixed term lengths (e.g. 3-5 years)
- Daily or weekly repayment plans
Online lenders cater to small businesses who may not qualify for bank financing. They offer more flexible underwriting criteria.
Online Lending Industry Growth
The online lending industry has experienced rapid growth in recent years. Improved technology and digital processes allow these lenders to provide faster lending decisions and access to capital. According to a 2021 study, the global online lending market size was valued at USD 59.23 billion and is projected to grow at a CAGR of 27.4% from 2022 to 2030.
North America represents the largest share of the online lending market currently. However, markets in developing regions like Asia-Pacific are emerging quickly. As small businesses increasingly look for prompt financing and loan options beyond traditional banks, the demand for online lending continues to expand.
Types of Online Lenders
There are several categories of online lending companies that offer small business loans:
- Peer to Peer (P2P) Lending – Lenders that match individual investors directly with borrowers. The investors provide the loan capital. Examples are LendingClub and Prosper.
- Marketplace Lending – Online platforms that allow institutional investors and lenders to compete to offer the best rates to borrowers. Examples are Funding Circle and Kabbage.
- Alternative Lending – Direct online lenders that provide access to capital that small businesses may not qualify for from banks. This includes companies like OnDeck, BlueVine, and Fundbox.
- Merchant Cash Advance – Providers that pre-purchase a business’s future credit card receivables at a discount to provide working capital. Examples are AmeriMerchant and RapidAdvance.
- Fintech Lenders – Financial technology companies that leverage automation and data analytics to streamline online lending. Prominent examples are PayPal and Square.
Reviewing the models of different online lender types can help you determine which option best aligns with your financing needs and qualifications.
Why Do You Need an Online Business Loan?
There are many scenarios where getting an online business loan can benefit your company. Understanding the common reasons for seeking financing can help determine if it’s the right option for you.
Common Reasons for Seeking Business Loans
Some top reasons small business owners take out online loans include:
- Funding working capital and operating expenses
- Purchasing inventory and supplies
- Investment in equipment, property renovations or furnishings
- Business expansion or growth plans
- Marketing and advertising costs
- Hiring staff or seasonal employees
- Bridging cash flow gaps
- Emergency funds or repairs
- Debt consolidation
For new businesses, loans provide startup capital. Existing businesses use them to manage cash flow, invest in growth, or bridge gaps in revenue. Having access to financing helps weather unpredictable circumstances too.
Evaluating Your Capital Needs
Before you seek financing, take time to thoroughly evaluate your business’s capital needs and determine the ideal loan amount to request.
- Review your current finances and sales projections. How much capital do you require to fund operations, growth plans, or large purchases?
- Look at upcoming one-time costs like new equipment as well as recurring monthly financing needs.
- Build a detailed budget for how the loan funds will be allocated. Identify the necessary loan size.
- Avoid the mistake of borrowing more than reasonably needed. This minimizes interest costs.
Having a well-supported loan amount request backed by financial data can help strengthen your application.
Types of Online Business Loans
Online lenders offer a variety of loan products to meet different business needs and situations. Understanding the main types available can help you choose the best option.
Exploring Different Loan Options
Some online business loan types include:
- Term loans – Installment loans with fixed monthly payments over 3-5 years
- Lines of credit – Revolving credit to withdraw funds as needed
- Invoice financing – Loans against unpaid client invoices
- Equipment financing – Funding for new equipment purchases
- Merchant cash advances – Pre-sold portion of future credit card sales
- SBA loans – Government-backed loans from online lenders
Term loans provide lump sums and work well for major investments. Lines of credit offer flexibility for working capital. Invoice financing taps unpaid invoices to access cash faster.
Reviewing your specific needs and future plans can guide which loan product makes most sense.
Choosing Between Term Loans or Lines of Credit
Two of the most common online loan options are term loans and lines of credit. How do you choose?
Term loans are better for one-time, lump sum needs like equipment purchases, renovations, or growth initiatives. The fixed regular payments provide predictability.
Lines of credit allow you to access smaller amounts as needed instead of a large upfront sum. This provides more flexibility to draw funds when minor cash flow issues arise. The variable payments work better for ongoing working capital.
Think about your primary purpose and time horizon to determine if a term loan or line of credit better suits your requirements.
While online lenders have more flexible requirements than banks, you still must meet certain criteria to qualify for a small business loan.
Who Qualifies for Online Business Loans?
Online lenders look for these general eligibility factors when assessing loan applications:
- Time in business – Most require at least 6-12 months of operations
- Annual revenue – Minimum of $50,000-100,000 in yearly revenue
- Credit score – Minimum personal credit score in the 600s
- Cash flow – Sufficient revenue to service the debt
However, requirements can vary by lender. Providing strong business details can help demonstrate you are a worthwhile investment, even if some factors are less than ideal.
Tips for Strengthening Your Application
If your business is very new or your personal credit score is lower, take these steps to improve your chances of loan approval:
- Highlight experience and past business success to compensate for new entities
- Provide realistic forecasts showing growth potential
- Put up collateral or assets to offset risk
- Offer higher down payments or shorten loan terms
- Bring on a cosigner with stronger credit
- Shop lenders with more lenient requirements
While criteria exist, there are ways to strengthen new or marginal applications.
Choosing the Right Lender
With the number of online lending companies available, it helps to evaluate lenders thoroughly before applying for financing.
Evaluating Lenders for Your Business
Here are key factors to research when comparing online business lenders:
- Loan amounts and terms – Do they match your borrowing needs?
- Interest rates and fees – Compare rates and factor in all fees.
- Funding time – How fast can you access funds after approval?
- Qualification criteria – Do their requirements fit your business?
- Customer support – How responsive are representatives?
- Loan management and payments – Are the options easy and flexible?
- Reviews and ratings – What do other borrowers report about their experience?
Looking at reviews, checking interest rates, and contacting lenders with questions can help determine the best fit.
Questions to Ask Potential Lenders
Speaking directly with loan officers at potential online lenders can provide valuable insights. Key questions to ask:
- What loan amounts do you offer for businesses like mine?
- How flexible are you on qualification criteria?
- What factors most influence your credit decision?
- How long does your underwriting and approval process take?
- When and how are the loan funds released?
- What interest rates and fees apply to the products I’m considering?
- Do you allow early repayments or adjustments to payment schedules?
- What support does your company provide for borrowers post-funding?
Their answers can determine if a lender is willing to work with your scenario and provide ideal loan terms.
Preparing Your Business Plan
Before starting the application process, take time to develop a strong business plan. This is a key document that lenders will review to understand your company and loan purpose.
The Importance of a Strong Business Plan
A solid business plan should provide an in-depth overview including:
- Business description and history – Include your products/services, operations, and target market.
- Financial history and projections – Provide past financial statements and future income forecasts.
- Loan purpose and needs – Detail exactly how funds will be used and why financing is required.
- Loan repayment plans – Show how you will service the monthly payments.
- Owner/management background – Summarize your experience and qualifications.
Having a well-written and thorough plan demonstrates you have a viable, growing business and capacity to repay the loan.
Tips for an Effective Business Plan
Follow these tips for creating a business plan that secures lender confidence:
- Keep explanations clear and concise. Avoid overly verbose descriptions.
- Focus on telling a compelling story about your business mission and prospects.
- Be realistic with financial projections. Overly optimistic forecasts raise doubt.
- Cite factual data like market research and historical performance.
- Admit weaknesses and provide plans for addressing them. Don’t exaggerate strengths.
- Use visuals like charts to easily convey financials.
- Have objective third-parties review your plan for feedback.
- Proofread thoroughly for spelling, grammar, and formatting issues.
A direct, factual, and honest business plan can sway lenders to approve your loan request.
Gathering Required Documentation
In addition to a business plan, online lenders will require documents to verify your company details and financial health.
What Documents Do You Need to Apply?
Expect to submit these types of documents with your online loan application:
- Identification – Driver’s license, passport, etc.
- Business documentation – Registration, licenses, tax IDs, legal documents
- Tax returns – Personal and business returns for 1-2 years
- Bank statements – Personal and business statements for 6-12 months
- Accounting records – Profit/loss statements, balance sheets, etc.
- Revenue evidence – Sales records, merchant processor reports, etc.
- Business plans and projections
- Collateral – Documentation for assets used as collateral
Having documents organized ahead of time can make the application process much smoother. Many lenders allow uploading documents directly online.
Tips for Preparing Key Documents
Taking steps to optimize required documents can expedite loan approval:
- Ensure tax returns are filed on time and free of errors.
- Choose bank statements showing adequate account balances and cash flow.
- Clean up profit/loss statements by adding explanations for anomalies.
- Provide full business formation documents showing proper structure.
- Only send the most recent and relevant documents requested.
- If possible, have financial statements reviewed or audited for assurance.
- Redact any sensitive personal information not needed to assess the business.
- Follow up to confirm the lender received all documentation successfully.
Thorough, accurate documents tell the best story about your business’s financial position.
Applying for the Loan
Once you select a lender and prepare all required documents, you are ready to complete the loan application.
Step-by-Step Application Process
Follow these key steps when applying for an online business loan:
- Gather documentation and create a business plan. Have your credit reports on hand too.
- Start the loan application on the lender’s website. Complete all required business, owner, and loan information.
- Upload or directly submit all required documentation through their online portal. Double check accuracy.
- Follow up on any other requests from the lender, such as interviews or additional documents. Respond promptly.
- Wait for an approval decision. Online lenders provide decisions within several days typically.
- Review the loan contract thoroughly and get any questions answered before accepting the loan offer.
Following each lender’s application steps carefully can expedite the underwriting process and approval decision.
Mistakes to Avoid on the Application
Be sure to avoid these common missteps on your online loan application:
- Providing inaccurate or inflated financial information that doesn’t match documents
- Failing to thoroughly check for errors before submission
- Overestimating projected income and growth
- Leaving application fields blank because you don’t understand them
- Submitting an incomplete application before gathering all information
- Not providing explanations for poor credit history or past business struggles
- Being unresponsive to lender follow-up requests and questions
Submitting a sloppy or dishonest application almost guarantees rejection. Prevent application pitfalls by taking your time and supplying precise information.
Approval and Funding
The online approval process is much faster than with traditional bank loans. You’ll typically get a lending decision within a few days of applying.
What to Expect After Applying
Here is the general process after submitting your online loan application:
- The lender will review your application, documents, and credit reports. They assess eligibility and risk.
- You may be contacted by the lender with follow up questions or requests before they make a final decision.
- If approved, you will receive a loan offer outlining the interest rate, fees, terms, and repayment details.
- Funding time can be as fast as 24-48 hours after signing the loan agreement. The process is streamlined since applications are online.
- Loan funds are deposited directly into your business checking account once you complete all signed contracts.
- Declined applications will receive notice explaining the reasons for denial. You can re-apply after addressing any issues.
Communication is key throughout the process. Ask questions immediately if you need clarification before accepting the loan.
Handling Loan Denials
If your business loan application is denied, follow these steps:
- Carefully review the reasons for rejection provided by the lender. Look for common themes.
- For criteria you can improve, take actions like paying down existing debt, boosting revenue, or injecting more capital before reapplying.
- Build a longer operating history, improve personal credit, or add a cosigner if in business less than one year.
- Shop other online lenders that offer higher loan amounts or have more flexible criteria.
- If new information arises to explain past financial issues, contact the lender to discuss re-evaluating your application.
With persistence and executing on lender feedback, many small businesses can eventually achieve online loan approval.
Repayment Terms and Options
Online business loans have structured repayment plans, usually with set installment payments deducted automatically.
Understanding Repayment Plans
Some common features of online business loan repayment include:
- Term length – Commonly 3-5 years. Longer terms have lower payments.
- Payment frequency – May be monthly, weekly, or daily installment payments.
- Payment amounts – Even installments that pay principal + interest over the loan term.
- Autopay – Payments are deducted automatically from a bank account on the scheduled dates.
- Early repayment – Many lenders allow prepaying the balance early without penalties.
- Late fees – Late payments incur fees around 5-10% of the overdue amount.
Review the repayment terms carefully upfront before accepting the loan to ensure the schedule aligns with your cash flow.
Questions to Ask About Repayment
Important questions to ask lenders regarding the repayment structure:
- Is there flexibility to change the payment amount and schedule if my revenues increase or decrease?
- How much advance notice do you need for early repayments?
- What are the costs to refinance or modify the loan later?
- Do you offer seasonal payment plans that accommodate business fluctuations?
- Can I divide my total loan amount into separate term loans or tranches?
- What options exist if I have trouble meeting payments at some point?
Having clarity on repayment flexibility and contingencies can prevent surprises down the road.
Interest Rates and Fees
Interest rates and fees are key considerations when choosing an online lender. Compare pricing across multiple lenders.
Comparing Interest Rates and Fees
Here are key factors to compare:
- Interest rates – Online loans range from 7-50% APR typically. Check if fixed or variable rates.
- Origination/processing fees – One-time fee to finalize the loan, such as 1-5% of the total amount.
- Late payment fees – Some lenders charge around 5% of the monthly payment per late payment.
- Prepayment penalties – Verify no penalties for paying loan off early.
- Lender fees – Ask about any additional lender fees for maintenance, underwriting etc.
Opting for autopay can reduce rates in some cases. Taking time to shop and compare pricing is worthwhile before selecting your lender.
Estimating the True Costs
The APR only tells part of the story. Make sure to factor in these additional costs when estimating the total costs of an online loan:
- Origination fees added to the loan principal
- Ongoing service fees
- Early repayment penalties if applicable
- Late fees for any missed payments
- Taxes on the interest payments
Reading the fine print and doing an apples-to-apples comparison of total costs can prevent surprise expenses.