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How Does Online Lending Differ from Banks?

Cash is the lifeblood of every business. It does not matter if the company is the lemonade stand on the corner or a massive multi-national corporation, this truth remains the same for every entrepreneur.

Outside cash is used in a wide variety of ways by business. These ways include working capital, payroll, purchasing inventory, expansion, and numerous other reasons.Recently, there has been a revolution in how small and medium size businesses access the capital needed for growth and even survival. In the past, small and medium-sized firms were forced to go to their local bank for business loans. Today, everything has changed.The widespread popularity and acceptance of the internet, combined with novel credit rating methods powered by big data, have opened the floodgates for online lending.

Inc.com reports that small businesses and individuals have borrowed approximately $12 billion from online lending firms over the last several years. Is online lending right for your business? Let’s take a look at the fundamental differences between traditional bank business loans and the new wave of online lenders.

Difference 1: Lending Guidelines

The difference in lending guidelines the primary reason many small businesses take the online route for loans rather than their local bank.Burdened by regulations and tradition, bank lending guidelines are very rigid and often old fashioned in our internet connected age. Relying strictly on credit scores and collateral, banks usually only allowed to make business loans to the most creditworthy of borrowers. The old saying that banks will only lend money to firms that don’t need it is very accurate when it comes to business loans.

On the other side, online lenders are mostly free to make their own guidelines and credit decisions. In other words, online lenders utilize metrics far outside of pure credit scores and collateral to decide if your business will be approved or not. The use of technology, big data, and quantitative methods provides online lenders a much more complete picture of your business to accurately weigh the risk of the loan.What this means is that online lenders can look at a much broader picture to approve your business loan.

Difference 2: Application Time

If you have every applied for a traditional bank business loan, you are well aware of the extensive amount of paperwork involved. Not to mention the days or even weeks required to obtain a decision.When your business is in need of capital, there is nothing worse than being forced to wait for a loan decision. Time is money in the world of business, and this is particularly true when it comes to loan wait times at traditional banks.

You see traditional banks have loan committees and other layers of bureaucracy resulting in extended application time whereas online business lenders have streamlined this process to a short application and quick decisions. Once again, it is the use of the internet and the technology to instantly process information leading to a rapid lending decision.In fact, online business lenders have streamlined the process to such a degree that the application only takes minutes, resulting in a near instant approval process in many cases.

Difference 3: Approval Process

Online lenders have a far different approval process than traditional banks. Online lenders look at far more business metrics than traditional banks. While traditional banks will look at your credit score and collateral, online lenders will analyze your entire business.Online lenders look closely at things like time in business, revenue, cash flow, and even intangible items to make lending decisions.

Obviously, looking beyond the simple credit score can provide businesses with less than perfect credit the ability to obtain loans. Many times small business owners do not have perfect credit, but this is often due to no fault of their own. Things like unexpected expenses or a slow sales period can quickly lower one’s credit score. Online lenders understand this fact when making lending decisions.

Difference 4: Loan Products

Most banks only offer traditional loan products. The conventional loan is one with a lump sum payment to the borrower, a set interest rate, payment, and time frame to pay it off. Online lenders are not trapped into offering traditional loans only. Online lenders can instead provide a wide variety of loans, such as credit lines and short-term loans, to best fit your business needs. For example, credit lines are an option that work much like a credit card in which you only pay for the amount of credit that you use. This allows for flexibility by enabling you to have the credit to use exactly when you need it and not a second sooner. Another example is short-term loans. Short-term loans can prevent your business from getting in over its head in debt, yet provide the capital needed to deploy quickly for a variety of reasons.

When looking for a source of funding, consider online lenders as a safe and viable option. Once you consider the differences between online lenders and traditional banks, you can decide if online lending is the right option for advancing your small business.

Peter Christopher

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