The Bank vs. Online Lender Debate for Small Business Funding
Should you try to get a loan from a bank or use one of the newer online lending platforms for businesses? If you’re consider an online source of business lines of credit, like Kabbage, you should know that their loans actually are backed by a bank.
Still, there are several differences in the experience that you are likely to have with a business lender that mostly operates online and one that typically operates out of a local bank building. It might help to consider both of these business funding alternatives before you make a decision.
Pros and Cons of Online Business Lenders and Banks
This discussion isn’t about crowd funding or P2P sites that are mostly meant for consumers. They may have their place in business funding and might merit discussion later. To keep this piece focused, it only centers upon the pros and cons of online business lenders vs. banks. P2P sites and crowd funding sites operate very differently than business loan platforms and have different uses.
Pros and Cons of Banks for Business Funding
If you can find a bank that will give you a loan, you might be able to access more money at a lower cost. That’s the positive side of banks. For a fixed loan, you might enjoy reasonable terms and a long payoff period.
Of course, you will enjoy those benefits of bank loans if you can get approved. Here’s what ban loan officers tend to look for:
- Some time in business to establish a good business credit score
- It helps if the owner also has great credit
- An owner equity stake
The Small Business Administration will partially back some loans, easing restrictions a bit. It usually takes documentation and some time to get a loan approved and funded.
If you want to open a second location or add new employees to your existing business, a bank loan might be the best option. If you have already established a good track record in business, you might also have an advantage. Both banks and the SBA have some new programs that might help startups more, but that isn’t what they are most commonly known for supporting. If you need a lot of money, like more than $100,000, you’re more likely to get it from a bank than an online lending platform.
Pros and Cons of Online Lenders
One of the biggest advantage of an online lending platform is speed. Typically, you can apply for your loan online, get approved online, and then get funded online. If you’re approved, you might see money in your account within a day or two. You aren’t likely to enjoy that kind of speed when you deal with a local bank or the SBA.
Limits of business lenders are usually around $100,000. Yes, fees will be higher than bank interest rates, but they aren’t outrageous. Also, these more modest loans are meant to get paid back fairly quickly. Most of the time, these tech-based lenders will offer a line of credit.
This is a kind of revolving credit, but it doesn’t work exactly like a credit card. With a line of credit, you can actually get the lender to deposit cash in your account.
The benefits of an online line of credit include:
- You can withdraw as much you you need and reserve the rest of the balance for later.
- You only pay fees on the amount you withdraw.
- Requests for funds from an online line of credit can usually get honored within a day or two.
Online Business Lenders Don’t Need Traditional Credit Scores
The biggest benefit for people with new businesses is that they won’t need to have established a fantastic credit score for their business. Online lenders can usually accept a link to a business checking account, payment processor, eCommerce site, or some other type of online information to validate a business.
Is a Bank or Online Business Lender Best for Your Business?
Banks may have more money to lend and offer lower interest rates. In other words, bank loans are probably great if you can get one and need a lot of funding. If your needs are more modest, like less than $100,000, you may enjoy these benefits of an online business lending platform:
- Fast approvals and fast funding
- No need for a business credit score or owner equity stake
- Flexibility and peace of mind with a business line of credit
In other words, one choice isn’t always best; however, a bank or an online lending platform might work better for your business.