Jul 30, 2015 Sean Albert
There is a wealth of borrowing options from which small businesses can choose, and the boom in cloud technology has allowed lending platforms to exist online. Virtualization can be beneficial for SMBs, particularly those are faced with a time-sensitive monetary requirement or are preoccupied with operational tasks and are not available to pursue a loan at a bank.
Online lenders can be a great option for many organizations, but how might you determine if borrowing from one best suits your organizational needs?
The basics of online lending
The whole process can be a bit confusing to newcomers, so here are some of the foundational aspects of online lending. Small Business Trends contributor Scott Shane noted that in the modern business environment, small businesses often need short term loans in small quantities that can assist them in successfully navigating temporary cash flow issues. Long term loans are unnecessary and can prove to be future hindrances in these cases, so it makes more fiscal sense for borrowers to seek out a lender that can provide funding quickly and for a short period of time.
Shane added that online lenders are more closely tailored to meet the specific needs of SMBs than the products offered by traditional banks. He remarked that many smaller companies do not necessarily have consistent cash flow, but rather receive large lump sums periodically. Inevitably, such organizations will find themselves in need of a stopgap to pay the bills.
This is where online lending comes in. Shane asserted that SMBs with limited credit histories may be more likely to receive funding from such providers, while more accurately addressing loan requirements in terms of length and amount. Alternative financing has been around for years now, but online lending can provide flexibility for borrowers, many of whom have very little free time during operating hours as they run their businesses. Instead of having to meet with a loan provider in person and waiting days or even weeks for a response, going through the application process online can lead to quick and definitive answers. Shane said that most approvals are made within just a few hours.
One of the reasons that SMBs might be better qualified for a short term loan from an online provider, Shane added, is that these sources use different criteria for determining credit worthiness than the traditional score-based methods employed by banks. Complex algorithms that include a variety of factors - some even make note of social media presence - allow lenders to make streamlined and measured decisions based on specific requirements, he said. The ambiguity of human decision-making is less of a factor, since in many cases the decision is made formulaically.
How to measure each lender's assets and liabilities
So, you've come to determine that seeking an online loan makes sense for your business' needs. But how do you choose the best lender from an increasingly saturated market?
NerdWallet's Steve Nicastro reported that many borrowers come to a conclusion by analyzing the annual percentage rate of each offering. While some lenders will advertise low monthly payments or interest rates, the APR is more representative of the true value of the debt. In contrast to the minimal information provided by interest rates, APR includes every fee associated with the loan.
In addition to seeking out APR figures, Nicastro found that for many loan-seekers, the speed of application and reception of the funds can be important. For businesses that need cash immediately, applying for a loan with a higher APR to meet temporary requirements might prove to be a worthwhile choice.