How to Make the Best Use of Online Financing For Small Business?

The pandemic is not only causing chaos to supply and demand goods and services, but it is disrupting credit.

Banks are skeptical about lending money out, government loans are running dry and investment capital hardly at an all-time high. The biggest victim of the economic downturn is small businesses, who are at the bottom of the pile for small bank loans. 

Fortunately, there are unsecured financing loans in Australia via alternative online lenders. These alternative lenders essentially disregard credit score — a measure which doesn’t flatter small business owners during these times — and instead look at the recent financial performances.

If their automated algorithm believes you can make the repayments, you will likely get a loan. Of course, with higher risk comes at a higher price.

Who are these small business lenders?

Some of the biggest providers of small business loans you may have heard of. Here are just a few:

• GetCapital
• Capify
• Prospa
• Lumi
• ondeck

Many people will initially be hesitant to get loans from online lenders. Not having a physical store that you can walk in like a bank branch feels like you are not exactly sure who you are doing business with. On top of that, they are not as well known, so you are putting your trust in internet reviews. Whilst this is a normal fear, it is not necessarily a rational one.

Many of the online lenders are public companies, such as Australia’s Prospa and USA’s Lending Club. This means that not only are they huge companies, but they are dealing with a mountain of regulation, public scrutiny, and shareholder expectations.

These are extremely safe companies, but you nevertheless want to be thorough when taking out loans.

Benefits of online lenders

1. Speedy application process

If you need funding, it may be a pressing, urgent issue that needs addressing. As most small businesses are aware, applying for a bank business loan can take an awful lot of time and energy. Business plans need to be drawn up along with financial statements and meetings with a branch worker. 

This is a night and day difference to online lenders, who are priding themselves on their easy applications.

The application for a small loan at an online lender can take a matter of minutes. A simple form and perhaps a copy of your latest financial performances.

The loan provider will leverage automation to scan your application, in which you will receive a decision in either a few minutes, hours at most, a few days.

2. Fast funds

The funds come just as fast as the application. Many online lenders offer same-day funding, whilst others may take a couple of days. Again, this is a far cry from the weeks you have to wait for bank loan funds to arrive.

3. Less likely to reject you

The other advantage that online lenders have other more traditional methods is their eligibility criteria. They aren’t fixated on requiring a near-perfect credit score. Instead, they just look at your financial performance and a few basic pieces of information.

Assuming your credit score is at least average and you can afford the repayments, you stand a very good chance of being accepted for a loan. 

Furthermore, the entire USP of online lenders is for serving small businesses, and they charge a higher price because of it. This makes them more willing to take risks with risky businesses.

4. Online comparisons

The industry is rooted on the internet, which has its advantages.  First and foremost, there is no extra service, products, or experience behind closed doors. In other words, there are no branches and region-specific services. 

This means that it is super easy to review these companies in a clear way, and also compare them. Because they are online companies, there is a tonne of online reviews surrounding them. This lets you make more informed decisions and pick the company that best suits your needs, as opposed to merely choosing what happens to be on your high street. 

5. It can be affordable

Online lenders are often criticized for their high interest (see below on downsides), but the truth is that it is nothing exorbitant or exploitative.

There are of course some providers that take interest to the extreme and are overcharging, but many are simply reflecting the cost of taking on additional risk. More importantly, many loans are still affordable. 

Downsides of using online lenders

1. Aggressive marketing

Because these companies don’t have a physical presence on the high street and are thus difficult to garner word of mouth customers, they have to rely on digital marketing techniques to attract borrowers.

There is nothing inherently wrong about this, but many have been reported to experience relentless emails from providers trying to sell them more loans. Not only is this an inconvenience, but potentially dangerous.

2. Rarely the cheapest option

Online lenders are of course more expensive than banks. This may be the difference of 20 percent in interest, or larger/smaller. Whilst rates differ, you’ll rarely ever find an alternative lender offering a loan at a lower interest than a bank.

However, often online lenders are the only option regarding creditworthiness and time, so technically they are the cheapest option — just not cheap in absolute terms. If you are rejected from a bank and an online lender is offering an expensive loan, to have the option is better than to have no option.

3. Manage the loan online

Everything is online with online lenders, unsurprisingly. This means that making payments, checking loan statuses and even customer support is pretty much all online.

You can’t meet with a bank clerk and ask them about your repayment plan. If you are not tech-savvy, this option may not be optimal for you.

4. Usually only small loans

Online lenders would rarely be lending over $1,000,000, and some may not even offer over $200,000. Compare this to banks that loan up to millions, this can be seen as limiting.

Not only this, but they are often short-term loans too, between a few months and few years. You are not going to have the option of a large loan paid back over 7 years, nor would you want to, given the higher interest.

When to accept higher interest and use an online lender?

Knowing whether to accept a higher interest loan is highly dependent on the situation. The main goal of a business (particularly during a pandemic) is solvency. Staying afloat is key, and online lenders are a helpful resource for this. 

Having said that, if you suspect that the repayments cannot be met, you should stay clear. There is no need to fund a dying business with debt that cannot be repaid. You can usually tell you are not in a good position to repay if the reason for your loan is a very sudden, urgent reaction to an obstacle/situation.

Proactive business developments funded by loans are rarely urgent, and thus repayments can be given more thought. So, take your time as much as possible to calculate if repayment is possible. 

The other scenario in which you should hold off from a higher interest loan is if you have time. After all, you can often find cheaper loans at banks. The process is long, but if you are in the unique position of not being desperate for the funds, then it may be worth exploring other options.

After all, if you are rejected from a bank loan (presuming this doesn’t negatively affect your credit, which you should ask before your application), then no harm is done. The online lender will always be there, ready for quick funding.