Entrepreneurs often complain about the difficulty of getting loans to start and grow their small businesses. Some banks don't lend to small companies, others want a lengthy track record, and many have a cumbersome and slow process.
Online lenders are changing all that.
The 2014 Joint Business Credit Survey administered by the Federal Reserve verified the perception that getting a loan is difficult. Lack of business credit was a top three concern for businesses at all stages, not just start-ups.
In response, companies are looking beyond their local banks. The survey reported that close to 20 percent applied to an online source. Although approval rates weren't especially high—less than half were approved—online lenders tend to offer smaller amounts and more flexible terms. Other appealing factors are quick decision times and better customer service. Applications can take under half an hour to complete, while the average for bank loans is 25 hours.
Accion has been offering alternative small business loans since the 1990s. Although they mainly provide very small loans to businesses that lack collateral or have marginal credit scores, they now offer loans up to $1,000,000. Accion uses a multi-step online process. There is staff available to help you through the process. The online loans range from $500 to $50,000, with an interest rate of 8.99 percent and a term up to five years. They also provide classes and webinars about small business topics.
The U.S. Small Business Administration (SBA) has long supported start-up and growing businesses through loan guarantee programs. Now online lenders are making the SBA's famously difficult process easier. SmartBiz provides five minute pre-qualification, half hour pre-approval, and money in seven days, depending on the size of the loan. They offer loans from $5,000 to $350,000.
Kabbage, a service of Utah-chartered Celtic Bank, offers lines of credit from $2,000 to $100,000. Fees can be high, up to 13.5 percent, but you pay on what you borrow. For businesses in a cash crunch, with pending orders or other short-term needs, this type of loan might work.
To compare options, Paychex has a small business loan resource center that allows you to see online lenders for different types of loans, special circumstances (veterans for example) or type of business.
Even retailers are jumping into the fray. Sam's Club® is building an online lending center offering SBA-backed loans of $5,000 to $350,000 with partner SmartBiz. Interest rates are projected to be between 6 and 8 percent and repayment is flexible. Members will receive discounts on fees.
With online lenders—as with banks—it is critical to read the fine print carefully to understand the process, fees, interest rates, any prepayment penalties, and liens on your business assets. Seek the assistance of your CPA or other trusted professional if you have questions.