When many think of online lending, they think of loan sharks, payday loans, or scams. They define online lending by early products like MCAs (merchant cash advances) or short-term loans and write the industry off under the assumption that all products found online come with double- or even triple-digit annual percentage rates (APR).
But in recent years, the online lending industry has evolved, opening up lower-cost opportunities to small-business owners. As a business owner who could very well need capital to grow their business, you need to understand that online lending is no longer just MCAs.
In fact, online lending has changed the small-business lending game in a big way -- giving more business owners access to credit than ever before. When four out of five small-business owners get denied funding by a bank, they can turn to a faster, more flexible, and more convenient online alternative.
But unlike what many believe, online business loans come in all shapes and sizes. There are loans beyond the expensive short-term loans and merchant cash advances.
Let’s take a look at just four examples of online loan types that are far more affordable than the industry’s pioneering products.
Longer term loans.
Surprised to see a traditional term loan here? You wouldn’t be alone -- but in fact, many business owners can and do secure these classic loans online.
If you’re not familiar, a traditional term loan is probably what you think of when you imagine a loan: you’re given a predetermined amount of money and have to pay it back, plus interest, over a fixed period of time.
Traditional term loans found online usually fall between $25,000 and $500,000, with terms of one to five years and interest rates as low as 7 percent or as high as 30 percent. They can come with daily, weekly, or monthly payment schedules -- it all depends on your business’s financial strength and your credit history.
These longer-term loans are offered by lenders such as Bond Street, Funding Circle, and Lending Club.
Business line of credit.
If you’re looking for financing but a lump sum attached to a fixed repayment period isn’t what you need, then you should consider a business line of credit -- also available online.
Like term loans, lines of credit vary in loan amount, repayment terms, and interest rates, but they’re both much faster to secure online than from a bank.
Lines of credit are often called “revolving” because, like with a credit card, you can pull the cash you need, when you need it -- and only pay interest on what you’ve withdrawn. A business line of credit can be the perfect fix if you’re searching for flexible financing.
Lenders like OnDeck and Kabbage offers credit lines that have similar eligibility requirements (and APRs) to short-term loans, while Lending Club offers a credit line with eligibility requirements (and APRs) similar to that of the longer-term loans described above. Other lenders, like Dealstruck or the Credit Junction, offer asset-based lines of credit using inventory or invoices to secure the line.
The online lending industry helps business owners out with asset-based loans, too. For the business owner in need of new machinery, equipment financing could be the solution.
A lender will use that piece of equipment you’re buying as collateral for the loan, so your loan amount and term are tied to the price and expected lifetime of the asset. Interest rates fall between 8 percent and 30 percent and typically these loans come with monthly repayments.
While it’s cheaper to buy equipment outright than pay interest on them, equipment financing prevents you from needing to save up -- and waste time not having that new car, oven, or exercise machine. And the best part? This can all be done online.
Related: When and How to Lease Equipment
Lenders like the Credit Junction or Balboa Capital offer this type of financing.
Another kind of asset-based loan, invoice financing lets you bridge the time gap between invoicing a customer and them paying you back. Yes, you can get invoice financing from an online lender… And they can even sync up with your accounting software to provide a seamless experience.
Most of the time, an invoice financing lender will upfront you 85 percent of the invoices you select, withholding the other 15 percent until your customer pays -- and taking their fees directly from that cash. They’ll usually charge a set fee for the transaction (say, 3 percent) and then a set percent per week outstanding. You’re paying the cost for speed, access to capital, and ease of mind. This isn’t the only way invoice financing works, though: some lenders like Fundbox will upfront you 100 percent of your invoices and charge you fees for 12 weeks and that’s it (regardless if your customer has paid.) You can pay the advance back early without any penalty.
Alongside Fundbox, BlueVine is another invoice financing company that is easy to apply to online.
The importance of shopping around.
Since the world of online lending has grown, it has also gotten more diverse. Because of this, it is important as ever to shop around when you’re evaluating online business loans. The difference in APRs between some of the products online could translate into thousands of dollars for your business. You need to make sure you know for certain you’ve found the most affordable product your business can qualify for.