Trying to Obtain a Small Business Loan From a Bank is an Exercise in Frustration. Don't Give Up! Why Borrowing From an Online Small Business Lender Simply Makes Sense.

Borrowing From an Online Small Business Lender

Business owners face both challenges and opportunities on a daily basis that require them to have access to capital. LVRG offers Small Business Loans, Revenue Based Financing, Cash Flow Loans, Working Capital Solutions and other Business Funding Options to help you overcome the challenges unique to your business, or to take advantage of important time sensitive opportunities.

In addition to traditional bank loans and the SBA a new breed of online lenders are offering small business loans. In many ways, online loans are similar to their traditional counterparts. The difference is in the way they leverage technology, their approach to the small business loan process, and the paradigm they use to evaluate a business borrower’s creditworthiness.

As traditional lenders shied away from the smallest small businesses, loans to those businesses have been in decline and slow to recover online lenders are making more capital available to small businesses by adding a financing option that didn’t exist previously.

In the same way companies like Amazon, AirBNB, and Uber have changed the way we shop, stay in a hotel, or hail a cab, these lenders are using technology to match loan purpose with the right loan product to help them fuel business growth and meet other capital needs. According to a survey of 592 Main Street small business owners conducted by the Electronic Transactions Association (ETA) in early 2016, the average business owners in the survey anticipate a 5x return for every dollar they borrow. What’s more, 94 percent of those same business owners perceive that having more options helps them do that.

Although many online lenders share some of the same characteristics, they are not all the same. Some lenders tend to focus on either long-term loans or short-term loans. Nevertheless, there are lenders that do both. As a result, depending upon your loan purpose (what you’re borrowing the money for), you’ll likely need to know before your search begins what terms might make the most sense for your loan purpose. For example, the loan term when purchasing short-turnaround inventory and a large piece of manufacturing equipment could be very different.

Even within each category of financing sources, numerous lenders propose different procedures, rates, and terms, which can be quite overwhelming for the borrower. Decision research shows that having too many options often reduces engagement and increases decision difficulty for individuals in general. You’ll know what I’m talking about, if you’ve thrown away that 20th credit card advertisement envelop in your mailbox.

Moreover, the growth of online lending has resulted in the introduction of sub-optimal lenders that engage in less than ethical practices. Unfortunately, some lenders push small business owners to take on more credit than needed, or initially promise unsubstantiated terms and rates in a bait-and-switch scenario.

Yet, there is some hope. Reliable and experienced lenders, both offline and online, have begun to focus on dealing with specific groups of small business customers, so as to provide a more prudent and specialized financing advice in supporting businesses’ initiatives for success. By better understanding the characteristics of industry-relevant financial statements and business models, such loan provider offers optimized funding solutions in a more efficient manner.

Applying for an Online Business Loan

The application process for an online loan is very different from a traditional loan at the bank or a SBA loan. Applications are usually a simple online form that only takes a few minutes to complete and the business will often receive an answer to their application within and hour, sometimes as quickly as within a few minutes.

The documents required for an online business loan will vary from what is required by the bank and may include:

  • The borrower’s Social Security Number
  • The business' Tax ID Number
  • Several months of business bank statements
  • Financial statements

Although the requirements might vary from lender to lender, most online lenders don’t require specific types of collateral to secure a loan. Rather, they apply a general lien to business assets during the loan term and require a personal guarantee (a common practice also used by many banks).

Interest Rates and Fees for Online Business Loans

Interest rates and fees will vary from lender to lender. And, because it can be confusing to compare loans with different loan terms, it’s important to ask any potential lender for some of the following information:

  • The total cost of capital (or total cost of the loan)
  • The fees associated with the loan
  • APR (which includes an annualized interest rate plus any fees)
  • Prepayment policies

This information will make it easier to compare loans from different lenders who might express the costs associated with their loans in different ways. For example, 57 percent of those who participated in the ETA survey chose a shorter-term loan option with a higher APR for a hypothetical short-term business opportunity because it offered a lower overall dollar cost when compared to a longer-term loan with a lower APR.

Although loans for consumers are commonly expressed in terms of APR, that is only one way an online lender might express the costs associated with a business loan since dollar cost is important to consider in relation to an investment opportunity. And, use of APR may be most helpful when comparing loans of similar term, but it’s always a good idea to also ask about the fees, the total dollar cost of the loan, and prepayment policies. In many situations, the total dollar cost might be be a more important metric than the APR to a small business borrower.

Repayment Terms and Other Considerations

The advent of daily and weekly periodic payments is a departure from a more traditional monthly payment schedule; nevertheless, many lenders (including online lenders) have adopted a more-frequent-than-monthly payment schedule. Not the least of these reasons is that it tends to smooth out the cash burden throughout the month and helps the lender control the risk associated with the loan.

If your lender requires a more frequent periodic payment, it’s important to make sure your business has the appropriate cash flow to accommodate the payment schedule. This type of payment schedule might not be a good choice for a business that relies on a month-end influx of cash flow to maintain business operations or infrequent inward deposits.

There are several situations where an online small business loan could make sense:

#1. Your business doesn’t meet the rigid credit criteria at the bank: Because many online lenders consider dozens of other metrics that demonstrate a healthy business, beyond just your personal credit score, they will often accept a lower personal credit score (provided other metrics demonstrate a healthy business).

#2. You need to fill a short-term business need: As described above, there are situations where a long-term loan will include a total dollar cost that is too high for the loan purpose. An online loan with a six- to 12-month term could be a better fit.

#3. You need an answer regarding your application quickly: Online lenders are typically able to respond with an approval or a decline of your credit application within the same day—sometimes within a few minutes.

#4. You need the capital quickly: There are times when opportunity costs are high enough that paying a premium for 24- or 48-hour access to capital is worth the extra expense. For example, the opportunity to purchase quick-turnaround inventory at a steep discount, could justify paying a premium for the funds.

The qualifying criteria for an online business loan will vary depending upon your lender, but are typically less strict than a traditional loan.

  • Required Time in Business: Minimum of 6 months
  • Minimum Annual Revenue: Typically $125,000
  • Minimum Personal Credit Score: 500-700

Regardless of whether you opt for a loan at the bank, a SBA loan, or an online business loan, it’s important to understand any and all fees and charges that could be applied to your loan down the road. In addition to late fees, are there other fees or policies you need to be aware of?

The fine print isn’t always fun to read, but it’s important to make sure you understand what’s included in there. For example, you should understand how frequently you might expect rate changes with a variable rate loan.

If there are financial terms you don’t understand, make sure they are explained to you by the lender or have a trusted advisor like your accountant or lawyer review the document and explain the terms to you before you sign it.

There are more options available for small business owners than ever before, but it’s important that small business owners become savvy about their choices to determine the financing option that will make the most sense for their business.

We provide an alternative to traditional bank financing. We’ve created a streamlined process that gives us an above average approval rating. We remove the hurdles of approval by reviewing each business outside the generic banking models. LVRG understands that some businesses will never meet the standards set by conventional lenders, and that’s where LVRG is different. We can offer financing options for most situations. We know your business hurdles at LVRG. Our financing approvals have several criteria outside basic creditworthiness, and this difference allows us to afford opportunities to deserving small business owners with less than stellar finances. Being non-bankable doesn’t have to mean that you are forced to limit your business goals.

The LVRG Partnership

We enter into partnerships with clients, and our approach to success is to connect small business owners with appropriate funding. We provide guidance and share our knowledge of the industry with every client. We are not merely brokers; we strive to promote the careful maneuvering of the lending landscape to every entrepreneur. We strive to assist in the building of your business, and we do this by not leaving you adrift in the lending arena. LVRG endeavors to build client relationships that last beyond a one-time small business loan. We provide consultants who understand how to fit entrepreneurs with the products that fit their business and not the products that most benefit our firm.

At LVRG, we believe we are different from other lending firms. We never set out to be the biggest, but we do strive to be the best. Our deep sense of integrity, professionalism, and commitment to the spirit of entrepreneurialism propel our determination to provide assistance to small business owners in a challenging economic climate.