The lending marketplace has been changing and growing rapidly in recent years, driven largely by the risk aversion and reluctance of banks to issue small-business loans.
The Harvard Business School Working Knowledge blog reports traditional banks approved only 14 percent of small-business loans last year. Additionally, a Harris Poll in the Wall Street Journal found that 19 percent of small-business owners had to postpone investments, because they couldn’t get a loan. Small-business owners can have a particularly difficult time getting capital from a bank if they have been in business fewer than two years, if their credit score is less than 640 or if they need less than $250,000.
Fortunately, there are alternatives to the traditional bank-installment loan. Online lending has been a source of innovation and promise for small businesses that are looking to invest and grow. According to stats from Harvard Business School, while the total volume of small-business bank loans decreased by 3.1 percent in 2014, small-business online lending increased twofold.
But how can small business owners save time and get the most value out of the online lending process? Here are key tips and insights for applying for a small business loan online.
1. Ensure your finances are in order.
Online lending provides more adaptability and flexibility than traditional banks, but you should still provide solid business records confirming your company is viable and can repay the money you borrow. Start with the basics: Make sure you have a registered business name and have incorporated your business with a tax ID number and a business checking account.
2. Use online accounting software.
Digital tools like QuickBooks, FreshBooks or Xero can help even the smallest business manage their finances with accuracy and efficiency. With your information available digitally, it’s easier to track your finances and prove you’re a desirable loan candidate. The automation provided by Kabbage allows you to connect your online accounting software to evaluate the health of your business, so these online tools can improve the ease and probability of being approved.
3. Keep business finances separate from personal finances.
Your business should have a financial identity separate from your personal finances. If you pay invoices with personal checks or credit cards, you run the risk of overcomplicating your finances or not passing an audit. Establish a separate bank account and credit card to manage all of your business spending under your business name.
4. Understand fees / hidden fees from online lenders.
Pay attention to the fine print of any loan application. Ask questions upfront to ensure you understand loans fees, interest, originations and any other costs you’ll pay for your loan.
5. Research the qualities of each lender — customer service, price, etc.
Other than access to capital, what do you need most from your small business lender? Compare your options, and read customer reviews on sites like TrustPilot.com. The lowest-priced loan option might not always be the best fit, especially if other small business owners report hidden fees or hassles with customer service.
6. Security tips.
Getting a loan online might seem riskier than going through a traditional bank, but a few basic precautions can help you keep your personal information safe. First, research each lender to make sure the company is reputable. Second, confirm you’re sending any financial information via a secure (https://) website connection. Finally, be wary of any lender that asks for an upfront application fee or an immediate down payment before your loan is approved. Legitimate lenders will package any fees as part of the overall repayment plan rather than charging you upfront.
There has never been a better time to get small business financing online. Using these tips can help you weigh your options to get the funding you need to grow your business.