alternative lending

Bank Loans vs. Online Lending Companies Which One is Better

Ezra Cabrera | October 11, 2019


    The alternative lending industry’s explosive growth presents a slew of options when it comes to small business financing. Nowadays, those who own a small business can get more access to credit that traditional banks turn away. With thousands of options available, it all comes down to this – would you apply for a loan at a bank or an online lender? Look over the key differences between both, which will help you zero in on the choice that’s just right for you and your business.

    You Have a Unique Business

    Online funding can work well for a business that’s unique because these lenders can present a variety of options to provide funding for a business that’s “different”. Unlike banks, most of them almost never ask for a business plan because they’re only interested in your business revenue.

    On the other hand, since entrepreneurs who are also innovators, come up with business solutions that are purely unconventional, these business owners usually find it challenging to acquire small business financing from banks. In other words, banks and other traditional lenders prefer to grant loans to industries that present clear business models and risks.

    You Need Money as Soon As Possible

    If you need money fast, consider an online loan. You can find countless online lending companies that can approve small business financing in a matter of minutes or hours. In fact, some of them can even give you the funds you need on the same day as your loan approval. On the other hand, you won’t get a speedy approval when you apply for a bank loan. In most cases, it could take weeks for banks to approve loan applications due to government regulations they are required to follow. To give you some insight into this, financial executives tell us there are approximately 28 separate steps involved in underwriting a bank loan.

    You Don’t Need A Lot of Money

    When you’re not looking to get a lot of cash, you should probably steer clear of bank loans. These traditional financial institutions have a tendency to avoid smaller loans anyway and in fact, there is a strong possibility they will give you a credit card application when you ask for more information about smaller loans.

    You need to understand that your definition of a large amount of money for your business can be insignificant to them. It’s ridiculous to expect your bank to jump at the chance to lend you a few hundred thousand dollars since minimum loan amounts vary as well. The bank’s cost of underwriting for a $150,000 loan can be just as much as underwriting a loan for $1.5 million.

    You Have a Start-Up Business

    Banks usually think that start-ups are risky, which is why if your business is in fact new, you’ll fare much better with an online lender. Remember that as much as possible, banks try to avoid granting loans to new businesses. They prefer to lend to an established business that has a solid track record and years of generating a strong revenue stream.

    You can find online lending companies who offer more flexibility to younger businesses than banks – especially if these start-ups are able to demonstrate healthy revenue streams. In case you’re wondering, minimum revenues that most of them require may vary. However, the common threshold is at least $50,000 in annual revenue.

    You Need the Lowest Rate

    When the absolute lowest rate is what you have in mind, your best bet would be a bank loan. Banks, credit unions, and other traditional financial institutions can offer you the most appealing rates for small business financing. Furthermore, they also offer SBA-guaranteed loans which are thought to be the gold standard of small business lending because of the business-friendly terms and the low rates.

    However, it’s important to note that this doesn’t necessarily imply that online lending companies are more expensive. You may be surprised to find out that some of these online lenders are able to provide you with competitive offers. Here’s the catch. It can be difficult to grasp how these offers compare to other options and how much they really cost because lenders do not have to disclose their costs using an Annual Percentage Rate (APR).

    On the other hand, you can find online lending companies that are willing to loan you as little as a thousand dollars or offer you smaller lines of credit that you can use when a need arises. Moreover, some of these lenders even offer microloans that are less than $50,000!

    Need Advice, Have Questions About Small Business Financing?

    Before you start scouring the internet to get more information about small business financing, be sure you talk to the lending experts first.

    About the Author

    Ezra Neiel Cabrera has a bachelor’s degree in Business Administration with a major in Entrepreneurial Marketing. Over the last 3 years, she has been writing business-centric articles to help small business owners grow and expand. Ezra mainly writes for SMB Compass, but you can find some of her work in All Business, Small Biz Daily, LaunchHouse, Marketing2Business, and Clutch, among others. When she’s not writing, you’ll find her in bed eating cookies and binge-watching Netflix.