Small Business Funding: Why Are Online Lending Agencies Slowly Taking over Traditional Banks as Loan Providers?

Ever since the financial crisis hit, getting business loans from banks has become challenging. The terms and conditions became a lot more stringent than they were before. While this did dampen the SMB scenario, for the time being, this also catalyzed the creation of several online lending agencies or companies. In the last ten years, the alternative lending industry has grown and superseded the traditional forms of funding for almost all kinds of businesses. It has had a significant impact on the conventional concepts of lines of credit, account management, and business fundamentals. The source of small business loans can now determine the nature and particularities of the lines of credit. Even though you might be looking into small business loans of the same amount, the source will govern the way the terms influence your business finances in the future.

Banks are the most traditional of all business financing sources. They provide loans at standard and decent interest rates. Most of the banks in the USA have fixed interest rates for their potential clients. Nonetheless, as an aftermath of the 2008 financial crisis, banks have tightened their requirements for qualifying businesses. Companies with highly conservative investments often perform better in front of the “jury.” It is true that in the last 4-5 years, these banks have adopted a few lenient measures to allow riskier small businesses and start-ups to obtain funding, but it is still difficult for new brands with primarily no business history or credit record to qualify for a similar loan. Banks run thorough checks of credit history, credit score, and business profiles when it comes to sanctioning loans for small businesses and start-ups.

Alternative lending to the rescue

The alternative lenders are more approachable for the same small businesses and start-ups. Even the newest of the new MSMEs and start-ups can find funding with the help of alternative lenders. While some of these online companies directly provide the necessary financing for the applicants, others act as a platform where the lender and the borrower can directly interact. These platforms include angel investor platforms, Crowdfunding platforms, and venture capitalist sites. Quite contrary to the traditional lending systems, most of these alternative lending companies thrive on high-risk business models that promise better returns. In fact, most businesses turn to alternative lending exclusively due to their quick loan disbursement. Non-profitable businesses and owners with past histories of bankruptcy can find it difficult to secure funding, but they still have better chances of finding a line of credit with alternative options.

Comparing the traditional bank loans with loans from alternative Online Lending Agencies

That was the basic overview of conventional bank loans and alternative online loan options for businesses. Now it is time for us to delve a little bit further into the nitty-gritty details.

Deciding by the time of approval

After you apply for a loan with any party, the waiting hours can seem to stretch for days and weeks. With banks, it is usually weeks before you get a word from the officials. It involves lots of official paperwork, branch visits, verification of documents and high levels of anxiety. There are times when after weeks of waiting, business owners have to return empty-handed due to improper filing of tax returns or the lack of updated documents. Even when the bank approves the loan, the amount can take weeks to come, and this delay can cost any business that is in immediate need of funds.

On the other hand, online funding methods are niftier. Thanks to encryption procedures, they are safe, and potential lenders can now verify the credentials of the applicants online within a couple of hours. It is a boon of financial technology, and the advanced algorithms of the same allow certain lending parties to provide their borrowers with cash within 24 to 48 hours of application. Processes like Crowdfunding and angel funding can take a bit longer since they involve the participation of more than one investor in most cases. Even then, the output is much faster and predictable.

Deciding by maximum loan amount cap

When a business needs to borrow a large amount, going for an option that is ready to offer lower interest rates, fixed rates of interest and amicable APR is, of course, the ideal decision. That, of course, defines the traditional bank SBA loan, and indeed, banks make the better option for businesses in need of substantial capital. Even with their stringent requisites and seemingly impeding reservations, banks can offer more considerable loan amounts to the qualifying businesses.

The alternative online lending agencies often restrict their credits to 6 digits only. There is a handful of companies that will lend $1 million or more to a few types of businesses, but just for specific loan types. Online lenders are flexible when it comes to the purpose of the loan, but as companies seek higher amounts, the prices can also become steeper. What you need to decide is whether the freedom you can enjoy from online lenders is worth the extra cost!

Differentiating by loan terms

The traditional banks make it more than difficult for new small businesses and start-ups to qualify for business loans. The MSMEs and start-ups that do qualify enjoy much better loan terms than those who approach online lenders. Banks only approve low-risk businesses for loans, and they can readily offer lower interest rates and extended repayment periods.

High-risk loans find favour with online lenders exclusively, but at the same time, these lenders like to cover the odds against their investment with high rates of interest and shorter repayment periods. Since these small business loans do not bear collateral, the companies often seek higher APRs along with stringent repayment terms.

Determining by security

Security is a huge concern when it comes to business loans. The safety of your business can depend on the loan terms and conditions. It is not only crucial for you to read all the fine print of the documents, but you also need to check the history of your lender before you get into an official agreement.

Traditional banks usually offer high security. They have been dealing with hundreds of businesses each year, and this has given them the chance to standardize their security requirements. One or more Federal bodies take care of these banks. It offers better security and privacy that extends to the banks’ customer policy as well. Banks take better care of their clients’ collateral and money!

The online loan companies may or may not have the same levels of security. There are cases where new companies without standard security measures have risked client collaterals. Small businesses must check the background, service history and TRUSTe or similar certification of their shortlisted lending companies. Always check if the online lender is compliant with the latest encryption protocols. It will determine if your data is safe in their service cloud. Online loan application and acceptance processes are a lot riskier due to the presence of hackers and malware that are ready to intercept card details and account information at every opportunity.

Similarities in collaterals and loan types

Both traditional banks and alternative online lenders offer secured and unsecured lines of credit. Unsecured loans are those that do not require any collateral or security. Secured loans, on the other hand, always demand security in the form of equity, tangible assets or certificates of deposit. Most alternative lenders just rely on unsecured loans, but an increasing number of online lenders are emerging with options for secured loans too. They accept unpaid invoices, equipment, inventory and certifications as collateral for the loans they sanction. Secured loans from alternative sources are more unorthodox and uncommon as compared to unsecured lines of credit.

No matter which institution you approach, unsecured loans are costlier than secured loans. In the latter case, the lending parties have collateral of equivalent worth that they can seize and sell to compensate for the unpaid amounts. In the case of unsecured loans, there is no security, so the companies have little leverage when it comes to due instalments.

Final words: small businesses prefer alternative online lenders over banks!

Banks are the better option for the larger businesses that can afford the waiting period. Larger companies often have enough resources for collateral as well. That is why we often see prominent enterprises opt for secured loans of large sums from banks. Smaller companies with a lack of business history and credit records find it almost impossible to penetrate through the checkposts that traditional banks have constructed. They do not have enough credit scores, documentation and recommendations to qualify for the small business loans. Therefore, most of the small businesses, micro-businesses, and start-ups go to online lenders that are ready to offer them capital in exchange for a higher cost, but with a shorter waiting period. Their pressing need for funds often outweighs the slightly high rate of interest and lower maximum loan cap of alternative lenders.