Choosing among Online Business Loans and Traditional Bank Loans
The first and foremost important requirement in order to start a business or turn any new idea into a business is capital. There are various sources available, from which one can arrange capital to start a new business venture. There are various risk factors involved in debt financing, and yet many small as well as medium enterprises prefer to take a loan to start their business. This loan is required to purchase real estate or equipment as well as inventory. Sometimes, small enterprises need loans for working capital.
During the initial phase of a small-scale business, the earned assets are not enough to bear the daily operational costs. Hence, loans are given to these companies on a short-term basis to cover the operational costs till the earning assets are enough to bear the same. There are various sources of debtors who provide loans for the businesses, and these include both online and traditional bank loans.
Comparing online business loans and traditional bank loans
There are various factors involved in both online business loans and traditional bank loans, which help business enterprises choose the preferred lender. Some of these factors are discussed here:
- Rate of interest
The rate of interest charged against an online business loan is comparatively higher than the traditional bank loans. Banks have easier access to money from various sources like the saving accounts of their customers or from the Federal Reserve. However, the alternative online lenders get access to money from sources like hedge funds or venture capital firms. As a result, the rate at which the bank gets money from the Federal Reserve is cheaper than the rate of the sources from where online lenders get their money. As a result, online lenders have to charge a higher rate of interest than banks against business loans.
- Type of business
Banks generally offer loans to businesses that are successfully operating for a minimum of ten years. As a result, small businesses find it difficult to qualify for traditional bank loans. The only alternative they are left with is to approach the online lenders. Since online lenders take the risk of providing loans to start-up businesses, they charge a high rate of interest.
- Credit score of the client
Online lenders offer loans to clients having a low credit score. They consider the individual’s cash flow statement as well as the business’s revenue record before offering loans. On the other hand, banks play it safe and do not consider providing loans for clients who have a low credit score. Since the online lenders take a risk in providing loans to such clients, they charge a premium rate of interest.
- Time involved in loan processing
The time taken to process a loan by online lenders is much less than the traditional bank loans. Loans by online lenders are generally approved within 24 hours, and the loan funds are available in two days, whereas the time taken to process a loan by banks is quite more.
Getting a loan from online lenders is much convenient in comparison to getting a loan from a bank as the clients do not have to visit the lending organization directly, which saves a lot of time on the clients’ part. The rate of interest is quite higher in online business loans; however, other factors like the time taken for loan processing, the convenience, the nature of the business, and such become important determining factors for clients choosing online business loans over traditional bank loans.
If an individual is applying for working capital loans, start-up loans, or small business loans, they would prefer online business loans. On the other hand, if the business enterprise has been running their business successfully for more than ten years, they might choose the traditional bank loans because of their lower rate of interest. While none of the two can supersede the other, it all depends on how established your business is and what is the amount you want to borrow.