If you’re a small business owner looking to borrow money to grow your business, searching various options for a small business loan has become time consuming, confusing and frustrating. Bank business loan applications are tedious, tiring, and cumbersome, but the more convenient online business loans cost more.
Why the difference? Here’s what you need to know.
Banks Get Money Cheaper
One of the reasons online business loans cost more for borrowers because they cost more for lenders, too. Banks have access to cheaper money from a couple of different sources.
First, there are the bank’s deposits/savings accounts from millions of Canadians. Banks have quick, easy, and cheap access to customer’s deposits and they use this money to make personal and business loans.
Second, the banks’ bank (otherwise known as the Bank of Canada) loans money to banks at lower rates than any other lender. The money that online lenders offer small business owners comes from investors like venture capital firms, hedge funds, and individuals/shareholders looking for a better return on their dollar.
Higher Risk Loans
Banks tend to deal with very low risk “sure thing” businesses and as such can offer lower rates. Most online lenders offer loans to business normally considered “higher risk” by traditional lenders. To take on this additional risk, online lenders charge higher interest rates. Instead of playing it safe, like the banks do, alternative lenders take more risk —so they need a bigger cushion in case things don’t work out.
Bank lending tends to focus on businesses that have been operating for at least five years. Younger businesses find it very difficult to even qualify for a traditional bank loan. New businesses without several years of healthy financial statements and revenue growth usually get the “thumbs down” simply because they don’t have a history of profit.
But increasing numbers of online lenders offer loans to businesses that have only been open for 6 months and they don’t ask for much, if any, business credit history to qualify. In these cases, the lender looks at sales history, industry experience and personal credit history.
Clients with imperfect credit scores
Online lenders offer loans to business clients with less-than-stellar credit scores—a group that traditional banks shy away from, as they’re expected to have a higher risk of loan default. By evaluating a variety of financial factors, like your business’s revenue trends and cash flow results from your bank statements, online lenders might choose to take on this risk—but at a higher interest rate.
Convenience Costs Money
In most cases, getting an online business loan is much faster than getting one through a bank. You complete your application by filling out one or more simple online forms from your desktop or mobile device – no need to visit a branch. Loans through online lenders take less than 2 days compared to 2-3 months from the bank. If your “time is money” or you have an unplanned opportunity or emergency, the speed of an online loan is always worth the cost.