The biggest differences between traditional lenders and online lenders

SMall businesses have historically struggled to qualify for loans from banks due to their more stringent requirements. As a result, online lenders have become popular alternatives to help bridge this financing gap. Although traditional lenders and online lenders offer similar products, their application and funding processes are very different. Small business owners should consider all of their options before making financing decisions.

Qualifications

The stricter requirements of traditional lenders make it difficult for small businesses to qualify for their products. For example, business owners and businesses must have a good to excellent credit rating, which is a FICO score of 700 or higher, and businesses generally must be at least 2 years old. In contrast, some online lenders such as Bizfi and BlueVine only need three months of activity to qualify for their financing products. Minimum income and credit score requirements are also much lower for online lenders, with some lenders, like Kabbage, requiring no minimum credit score.

Paperwork

Banks also require a lot more paperwork than online lenders. This includes detailed business plans with financial data, business summaries and investment information. Traditional lenders also require personal and business tax returns, legal documents, and other personal information. Although you may need to provide similar documents to some online lenders, most require less documentation. Some alternative lenders only require you to link other online bank or financial accounts during the application process. For example, to qualify for Fundbox invoice factoring, you must use an online accounting service for at least six months and link that account to Fundbox.

Funding deadlines

Another difference between online lenders and traditional lenders is the time it takes for borrowers to receive an approval decision and funds. Banks can take anywhere from a few weeks to a few months to notify you of their decision, let alone give you the funds you need. This can be especially frustrating for small businesses that need capital immediately to cover day-to-day expenses or invest in necessary equipment. Online lenders, on the other hand, can give you a decision within a business day and sometimes they can deposit your funds just as quickly.

APR

One of the biggest drawbacks of online lenders is their higher APR. Despite more lenient requirements and faster funding times, some APRs can be well over 90%. In contrast, banks can offer single-digit rates to qualified borrowers. While some alternative lenders such as OnDeck also offer single-digit APRs, only established businesses with excellent credit ratings will likely qualify for these rates.

The essential

Online lenders can be a good option for small businesses that haven’t been able to qualify for a loan from a traditional lender. However, there is less regulation in the online lending industry, which means small business owners can fall prey to predatory lending practices. Banks can provide the funds you need at lower rates (usually), but you’ll have to wait much longer and need stronger credentials to qualify. Before deciding where to borrow funds for your small business, be sure to compare your options.

The article The biggest differences between traditional lenders and online lenders originally appeared on ValuePenguin.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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