“Banks loan money to businesses that can prove they don’t need to borrow the money.”
This statement is an adage for a reason. Traditional brick-and-mortar bank lending can be inflexible and hard to attain. When you consider that a US$10 000 loan and a US$10-million loan cost roughly the same amount to administrate – with the latter providing significantly greater profit – it’s not hard to guess why banks tend to invest in large corporations rather than small businesses. For years, small businesses that didn’t qualify for funding had to rely on credit cards or bootstrapping.
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Then came online and platform lending. Thanks to improved technology, online lenders offer new ways of assessing risk with a faster turnaround. Here’s why online lending can be a perfect partner for many small businesses.
1. Faster processing time
From the time you realise you need a loan to when you have funds in your account, a traditional funding can take a month or more. The paperwork alone can take a couple of weeks. This long (and varying) time frame makes it difficult to map out the application process. Receiving funding too early means paying extra interest. Getting funding too late means missing out on opportunities or being stuck with money you no longer need.
Online lenders offer applications that are available online 24/7, and processing applicant information typically takes less than one day. That means money in hand faster, with less effort on your part and in a time frame that works for your business.
2. Different approval metrics
FICO credit scores have their place in lending decisions, but they aren’t as reliable in assessing small businesses when considered without other information. If your application isn’t compelling by traditional metrics, you’ll likely have trouble getting approved for a loan or paying higher interest and fees.
Online lenders do take FICO scores into account, but also consider your overall business performance, industry trends and social reviews in reviewing your application. This provides new businesses and entrepreneurs with bruised credit the opportunity to get approved through an online lender.
3. Real-time funding
Even after getting approved for a traditional loan, funding can take upwards of a week. That can be too slow for on-the-go business owners who can’t always predict their next big opportunity or gap in cash flow.
In most cases, an online lender deposits funds into your operating account less than 24 hours after you’re approved. Combined with rapid approval decision, this means same-day cash for emergencies, equipment purchase or any other expense delivered when you need it.
4. Wider variety of lending options
Large, established lenders expect borrowers to fit their lending options. If they don’t offer the right product for your business, you’re expected to shift your business model to squeeze your square peg into their round hole.
Online lenders are in the business of financial innovation. They offer a variety of lending options suited specifically for your needs in terms of size, funding, repayment and scale.
5. Flexible repayment
Whether it’s an instalment loan or a line of credit, traditional lending options come with fixed, inflexible repayment plans. Meeting the payment schedule can be challenging if your business experiences a temporary emergency, and deviating from that plan can result in high fees and penalties.
Online lenders offer more flexible payment options, from predictable monthly payments to daily withdrawals from your sales.
Of course, there’s no one-size-fits-all answer to every business’ funding and cash flow needs. Once you understand online lending and how online lending can impact your business, then you can choose your financing according to your business’ unique needs.
Feature image: GotCredit via Flickr.
