Nowadays, different online lending platforms utilize technology to buckle traditional lending and have become a significant facet of the FinTech sector.
With this, entrepreneurs and business owners alike who want to apply for a business loan can now secure funds through online providers and skip local banks. It’s good news for the business sector, especially to SMB (Small and Medium-Sized Business) owners.
The rule of thumb to play it right is to get the exact amount of capital you’ll need for your business, in a reasonable period and at your lowest qualified price.
Online lenders aren’t created equal. As such, you need to scour for a lender who provides reliable financial options. Go for long-term loan products with low-interest rates combined for the lowest APR (Annual Percentage Rate) and smallest monthly payments.
Your business dream might quickly turn into a financial fiasco if you get an expensive short-term loan instead. With that said, here are five crucial guidelines to help you identify which online lender will fit your needs.
Prepare the Necessary Documents and Other Legalities
Get all your business records in order and ready before starting the process with any lender once you’ve decided to apply for a business loan online. It doesn’t only refer to paperwork. You also have to check your business plan and cash flow.
You also need to consider the following factors such as how much money you need to borrow and which types of payments can you afford. There are several low-cost, even free resources that will you figure them out.
You can refer to a local SCORE office or with SBA (Small Business Administration) Development Center for small business owners to get one-on-one mentoring or workshops.
Check the Criteria
As a business owner, you’re expected to have sound experience in the industry you’re in along with a good credit score. It owes to the fact that possessing proof of your ability to repay the loan is quite important.
Both business and personal collateral is also a big help. And it’s also good if you’re personally invested in the company. Further, you also have to prepare the required documents and other legalities. But then again, this depends on lenders as they might need different criteria.
No matter your lender of choice, you’re going to need the following:
- Business Information. Lenders will want to know to know your business’s age, its net income, and who your customers are.
- Bank Statements. Lenders will need bank statements to also evaluate the financial health of your business as well as your personal financial health.
- Legal Documents. You’ll need to show your proof of ownership and other proper permits and licenses of your business.
Choose the Best Loan Type for Your Business
Besides checking the loan criteria, you’ll also need to identify the right business loan for you before searching for online lenders. With a gamut of online loans available like Credit Ninja Financing, it’s essential to explore all of your options.
Take your cue from the following types of loan.
- Traditional Term Loan. You can get cash upfront and repay it over a set term, typically 1 to 5 years through a traditional term loan. Such loans are granted for a particular business purchase like equipment.
- Personal Loan. It might be a little contraindicated, but it’s actually possible to use a personal loan for business purposes. Applying for a personal loan could be a sound idea, especially when your business doesn’t have a robust financial history yet.
- Business Line of Credit. A business line of credit can be a good solution if you have a problem with cash flow. It will allow you to borrow money only when you need it.
- Invoice Financing. Invoice financing permits you to get money for invoices even before the client pays. Usually, a percentage of the bill is given to the lender.
- Short Term Loans. Short-term loans are similar to traditional loans, but they have higher APRs and shorter repayment periods. Also, the paperwork for short-term loans is not that stringent and may approve your application even if you have bad credit.
- Business Cash Advances. Also known as merchant cash advance, such loans provide business owners with a lump sum of capital. It’s payable through giving a chunk of your day-to-day credit card sales.
The approval process for business cash advances is also easy compared to other loans. And the best thing about it is you don’t need a rockstar credit score to get approved. The only snag is that fees are quite high, if not, the highest in the market.
Look for Different Loan Providers
Given that business loans typically range from $2,500 (for microloans) up to seven figures at max, most financial institutions don’t like to deal with meager amounts as they still require the same amount of work and are less profitable.
That being said, you may want to consider the following options:
- Credit Unions and Community Banks. If you’re a startup or small business owner, these financial institutions are your best shots because they’re more willing to work with small businesses.
- Nonprofit Microlenders. Microlenders offer favorable terms and interest rates. They also educate borrowers on how to best use the money being loaned.
- Alternative Lenders. Alternative lenders may include crowdfunding sites, peer-to-peer lending platforms, purchase order financiers, to name a few. The majority of these lenders offer quick loan approval. However, interest rates are higher compared to traditional loans.
Determine the APR (Annual Percentage Rate)
There are untrustworthy lenders who will disguise their terms with misleading or confusing pricing information. They might conceal their pricing as a general “factor rate,” “rate,” or “cost” instead of clearly presenting an actual APR.
Know it that APR includes loan term, interest rate, and fees. As such, you need to focus on that all-in-one figure so you can make efficient comparisons with different lending options. Be cautious if the lender won’t give you an APR when asked.
It pays to be as prepared as you possibly can when it comes to searching for the right business loan for you. Keep an open mind about how much money you need and be sure to look for loans from all sorts of sources. Moreover, always ask as many questions as possible to the lending officer before you sign a contract.
If you’re resourceful, diligent, and careful, you’re well on your way to getting the best online loan for your business.