Online lenders are revolutionizing the world of small business loans. Rather than wading through a complicated and lengthy application process, small business owners can quickly and easily apply for a loan online, boosting their working capital in days rather than weeks or months. How exactly are online lenders changing the role of small business funding? Take a look here:
- Focus on data
Traditional small business lenders typically require a detailed business plan and they look closely at the business or its principals’ credit histories. This can make it especially hard for startups or businesses who have suffered from credit issues in the past to get funding.
Online lenders, in contrast, have moved away from these evaluation trends. Rather, they harness data to create a picture of each business. Lenders weigh unique information ranging from an applicant’s seller ratings on eBay to the flow of revenue into a business’s PayPal account. By using such a wide variety of information, lenders are able to get a more accurate picture of a business’s health and its ability to repay a loan.
- Faster underwriting process
Because most of the information is gathered quickly online, underwriters for online loans can work faster than underwriters for traditional bank loans. As a result, the approval process can take mere minutes and loans can be funded in days.
This gives businesses a newfound flexibility. If their clients fall to pay their invoices, if an emergency pops up or if revenue momentarily slows, businesses no longer have deal with waning resources and a waiting process. Instead, they can access the funding they need almost immediately.
- Product flexibility
As the growth of online loans continues, these lenders are offering more and more products. While many lenders offer lump sum loans designed to be repaid with a portion of sales, other lenders offer lines of credit (LOC). With an LOC, borrowers only take the funds they need as they need them, ensuring they don’t pay interest on money they don’t use. Online lenders are also branching into factoring loans (advances on accounts receivables) and inventory loans (loans secured by inventory).
- Transparent process
The benefit of online lenders doesn’t solely rely on the fact that these loans are speedy and efficient – the transparency of the process is changing as well. While loans used to be approved in a back office using metrics largely foreign to most borrowers, online lenders embrace a more transparent process. They also educate borrowers about the data points involved, making it easier for borrowers to increase their chances of approval.
- Lower interest rates
For the increasing number of small business owners who have turned to credit cards in favor of traditional bank loans, online lenders offer a significant amount of savings. Credit card companies know that their card holders are likely to overspend and that most business owners don’t read their contract carefully enough to notice the interest rates. As a result, these companies have a captive audience of people willing to pay exorbitant interest rates.
Small-business owners who cannot afford to pay off their balances every month incur interest charges that can ultimately make their debt unwieldy and repayments unaffordable. Online lenders have eagerly drawn borrowers away from this racket by offering lower rates and even encouraging borrowers to roll their credit card debts into an online loan so they can pay them off faster. Because of all the information they have on their borrowers, online lenders can reliably work with the borrowers who are most likely to repay their loans. As they erase much of the risk for underwriters, rates fall until they reach equilibrium levels, which appeals to both lenders and borrowers and tends to be much lower than credit card debt.
Online lenders have changed the world of funding for small business owners, opening the process up to an increasing number of people and businesses. However, within the industry, advancements are always afoot. One of the most essential aspects to monitor is the development of technology. As the industry and technology continues to develop and progress, online lending will be able allow lenders to assess and fund loans even faster and more effectively.
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