Many small businesses worry about funding when they’re just starting. Before internet banking became a popular option, they would traditionally go to their local bank or credit union to borrow the needed funds. But due to risks, most banks will not lend the necessary funds to small start-up businesses, so they end up looking for a viable alternative.
But some alternatives have been taking the lending market by storm, allowing easier access to a variety of alternative lenders, to secure financing. However, these aren’t the same old forms that you’ve used to fill out at your local banking institute.
We are going to get into the nitty-gritty of online loans and how to choose one that will give you and your small business an added benefit.
What Are Online Loans?
An online loan, like a traditional, is where you borrow money from a financial institution, except it’s online. While what you need to get a new loan will depend on the actual bank, but for the most part, they are like one another.
Is It Safe to Borrow Money Online?
When you put your personal information into an online form, there is always the risk that someone could either hack the website or that there is a data breach. But the good news is that there are ways to get around any potential problems when applying for a loan on the internet. We will talk about how to make sure that an online lender is legit, so your information is safe.
When You’re Applying for a Loan Online Avoid Giving Identifying Info
While loan applications and other banking services may ask for your social security number, you can omit them, until you speak with someone from the company. By keeping identifying info safe in advance, you are saving yourself or your business from surprise payments and the possibility of getting your identity stolen.
Scammers can create websites and use names that mimic the names of more legit financial companies as well as lending institutions. It is better to keep your information safe, rather than to pay for it later on because you were taken advantage of online.
Go to the BBB
Check with the companies local Better Business Bureau to see if they are listed. When you go on their site, choose the city that they’re located in and go to search. There you can put the name of the company in and see if they come up, as well as find out their rating.
Your search should pull up the company name, address, telephone number and website to identify that they match up to what their business page says. You can also specify your criteria by looking for the phone number or address only to find your results.
Take Your Information to a Professional
If you have an unsigned agreement from an online lender, take it to an attorney to look it over. A lawyer can spot if there are things that would pop up like red flags. Your potential lender should be okay with having someone else look everything over. But if they are trying to rush you or try to hurry things along, then you are most likely being scammed.
Find out What the Payment Requirements Are
Does the lender want an upfront payment before processing your online loan? If the answer is yes, then you’ve approached a red flag from online lenders. Legitimate companies will always disclose any fees you need to pay them and will deduct the funds from the actual loan principal. Legit companies do that rather than asking for prepayment before applying for a loan.
If the online bank is trying to guarantee you money for your business by paying a fee, then it is an excellent time to run the other way.
Research Other Sources
Lenders are required by law to register with state agencies before they can do business in the state where they’re located. You can check online or on the phone with their attorney general, banking oversight, and financial registration agencies, to make sure that the company you are working with is legit.
What Are the Benefits of Using Online Lenders?
Small businesses will find a lot of benefits when using an online lender to apply for a loan, besides ease and convenience. Some benefits of going with the next generation of lending institutions are listed below:
You Will Be Approved Quicker
Most online lenders will tell you straight away if you are approved to borrow money through them. You will also be told what your interest rates are, as well as how much your monthly payments.
While you can fill out an online application with your brick and mortar banks, but it will take a lot longer for you to hear if you qualify to borrow money for your small business. But it doesn’t take as long to get a reply when you borrow money online.
Lower Interest Rates
Because online banks and lenders do not have as much overhead as a traditional financial institution, you won’t see the higher interest rates that you would see with a physical lender. Plus, customers have the option to shop around and find the lowest interest rates available. The lower the APR, the more money you save each month on your payments.
Easier to Be Approved
Since the Recession of 2008, physical banks have been more selective on whom they qualify for a loan. If your credit is stellar, then it’s much easier to be approved to borrow money. But for those with subpar or are building their credit score, they will have a harder time to get accepted for a loan.
But with online lenders, you are more likely to qualify for a loan, even if your credit is not that great. They are also more likely to use alternative information to determine how creditworthy you are.
Types of Online Loans
If you are looking at using an online lender to get a loan for your business, then you should learn about the different types of loans that you can apply and qualify for to help your company. Not all investments are the same, and many of them may not suit your specific needs. But it is vital that you at least know about the different loans that could help your business before you get an online loan.
Below, we are going to talk about the different ways of borrowing online, what the loans are for and if they are the right fit for your needs.
SBA Loans- These are loans that are guaranteed by the Small Business Administration, and are suitable for small businesses who are still new, but have excellent credit. Your business loan is guaranteed by the federal government to help finance a part of it, that way owners can get an extraordinary rate, without using a traditional bank. These are great if you want to find at least someone who will guarantee you a decent rate on interest and advice to help new business owners grow.
Term Loans- If you have stellar credit and are looking for borrow money online, then a term loan would be for you. Like the term loans you’d get from a physical bank, you would receive a large sum of cash upfront and then make a monthly payment to the lender. If you have a specific project in mind, then this would be the type of online loan you’d need.
Short Term Loans- Like traditional term loans, short term loans are best for those who need an immediate short-term solution. But beware that the faster you need the money, the higher the interest rates to protect online lenders from potential borrowers who have lower credit scores. They are quite easy to get compared to other traditional loans but don’t tend to be cost-effective for small business owners.
Business Lines of Credit- If you are looking for a flexible, revolving line of credit, then take a look at accessing an online Business Line of Credit. Like credit cards, business owners get access to funds, and only pay interest on the amount that they borrowed. Once the cash is paid back to the lender, then the line of credit begins all over again.
If you run a seasonal business, or you want that extra cushion in case something unexpected happens, then this type of online lending is the perfect choice for your needs.
Invoice Financing- Here is an option that is not only great for small business owners but the self-employed as well, especially when clients are too slow to pay what they owe. With Invoice Financing, you can receive money to cover your bills while waiting for customers to pay you for your services.
Most online finance companies will advance a small business owner or self-employed individual for around 85 percent of your invoice value while holding the other 15 percent. Once you pay the money back, then you will receive the other part of your invoice minus any fees. The fees are 3 percent for processing, and then you are charged 1 percent for each week your client doesn’t pay, making it a less desirable option for small business owners.
Merchant Cash Advances- Are you looking to get some cash quickly, but don’t have the best credit score? Perhaps you should look into getting a Merchant Cash Account that is offered to businesses of all sizes by several online lenders.
It works by the lender sending a large lump sum of cash to the merchant, and then they are repaid by taking a daily part of credit and debit card sales. Using a merchant cash advance loan is an excellent option if your business has slower months because the online lender will not take out as much money.
Equipment Financing- Many small businesses will buy equipment to keep their companies running smoothly. But, because of the costs to obtain the necessary items can be quite expensive so that online lenders can offer them equipment financing.
The way it works is that a lender will look at your assets rather than your credit score, then give you the amount to pay for what you need for your business. The lender will then have you make payments to your online loans for the life of the equipment, which can cost you more in the long-run.
Online lenders suggest that business owners should make sure that they have enough revenue from your equipment to outweigh the cost of interest before you get a loan online.
How to Borrow Money
Now that we have gone over the different types of business loans, that you can get through an online lender, we are going to talk about the steps you should take to apply for your online loans, then get your cash. Applying for an online loan is a relatively straightforward process, so let’s start going over what you need to do, so your business can get the funding it needs.
Find the Right Loan for Your Needs- Look through and research all your loan options, and find the one that suits your business needs best. Check and see if the online lender requires any hard inquiries before you apply for a loan online.
Review the Requirements of Each Lender- Now that you have found the right online lender, do you meet the minimal requirements to qualify for a loan? Small business owners should focus on and check off the lender’s list of things they need from you before you hit apply.
Gather the Required Documents- Once you discover that your business meets all the requirements for your desired online loan, then gather the necessary documents that your online lender will need to apply for your small business loan. Some required documents can include-business tax returns and bank statements.
Submit Your Application- Now that you have everything for online lenders to see that your business isn’t going anywhere, you can apply for the loan that will fit your needs and situation. The process is simple; you fill out your information to your online lending company of choice and hit submit.
What You Should Avoid
Many small business owners come across several very short-term loans otherwise known as payday loans when looking for an online lender. While payday loans seem excellent on paper, they lead borrowers into a bottomless spiral of debt. The good news is that spotting these types of scammers is quite easy, once you know what to find.
These are the red flags that you should look for to spot and avoid a payday loan.
- Extremely Short Term
- Outrageous Interest Rates
- Up-Front Fees or Payments
- Don’t Perform Credit Checks
When you want to take out a loan for your business, you should always make sure that you can pay the amount of what you’ve taken out over several years, with a decent interest rate. Remember, that if something looks too good to be true, then it most likely is and you will eventually get burned.
Are You Ready to Find an Online Lender?
Business owners should shop around and find the best rates before applying for an online loan. Make sure that the lender you choose is reputable, and can help you with any questions or concerns so that you can avoid the scammers.
At Dealstruck, we offer some of the best rates for online loans and have been creating customized solutions for small business owners since 2013. Let our credit experts find the perfect business loan that fits your needs and situation by visiting us today.