Online Lending: What You Need to Know

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The following guest blog post was composed by Emily Kate Pope, managing editor at the Fundera Ledger. It is intended solely for informational purposes. It is not an endorsement or recommendation and should not be construed as such. The views and opinions expressed are those of the author and do not necessarily reflect the opinion of Supplier Connection, its members, or regional growth partners.

The post is intended to provide small and diverse suppliers with an introduction to the emergent online lending industry.

 

Are you ready to scale up your small business? Being in the position to grow means your business is doing well enough that you need more — whether that means increased inventory, more efficient equipment, or simply more employees.

The problem is, sometimes you need to scale up more quickly than your revenue will allow. What do you do if you need resources to service your new accounts, but you don’t have enough working capital to cover the cost? You might want to look into securing financing for your business, and if you need money fast, online lending could be the best solution.

What is Online Lending?

It used to be the case that banks and credit unions were the only options for small business loans. But, thanks to the advent of the internet, as well as the deregulation of the banking industry, now there are a wide variety of alternative lending models available.

In general terms, online lending can be a fast and easy way to access cash for your business. Online lenders typically have a virtual approval process which can happen quickly. It may be easier for some businesses to qualify for a loan using an online lender, since their approval metrics and rates reply on more than just your credit score.

Since online lenders are typically willing to assume more risk and have a speedier approval process, they can be invaluable in helping small businesses scale up quickly.

What Are the Risks?

If you are a newer business, have an immediate need for working capital, or have a less-than-desirable credit history—working with an online lender could be a great option for you.

However, it’s important to keep in mind that because online lenders move fast and are willing to take on more risk, their products are often more expensive than a traditional bank loan.

While there are many reputable online lenders, there is less regulation online, so predatory lenders do exist. It’s important to do your research and work with a lender or online lending marketplace that offers guidance and competitive rates.

What Are My Online Lending Options?

While there are many options that can be found online, here are some of the most popular and effective.

Short-Term Loans are similar to a traditional term loan, but you pay back the money with daily or weekly payments over a shorter time span, typically with higher interest. This is a good option if you’re in the need of fast working capital.

Accounts Receivable Financing, or invoice financing, lets you get paid for your outstanding invoices right away—for a fee. It’s a good option if you have a long list of clients, but are waiting for invoices to be paid before you can put money back into your business.

Merchant Cash Advances are a quick and short-term method for small business financing. With this option the online lender advances a borrower a lump sum of capital, taking a fixed percentage of their daily credit and debit card transactions until the advance (including interest) has been fully paid off. Be aware that this is typically the most expensive type of financing.

Leasebacks work if you have equipment but little working capital. You can use them to sell a valuable piece of equipment to a lender, then enter into a lease-to-own arrangement, and eventually buy the equipment back after continuing to pay a leasing fee.

Peer-to-Peer Programs include options like crowdfunding and peer lending where the business owner would turn to private companies and individuals for funding rather than a specific lending institution.

Is Online Lending Right for Me?

When it comes to small business financing, you should take the time to thoroughly think through your options. You will typically get the best rates from a traditional bank loan, but the requirements and application process can be more rigorous and time-consuming.

If you are in need of a quick business loan scale up your business, going through an online lender may be the right option, but remember the products these lenders offer are more expensive than traditional bank loans. The online lending market is filled with many successful lending models that look entirely different from one another.

Think about your short- and long-term business goals, and do some research to find the best lending option for you.

 

Emily Kate Pope is the managing editor at the Fundera Ledger. She specializes in all things small business finance, from lending to accounting.