In much the same way larger businesses rely on access to capital to fuel growth and fund many day-to-day operations, small businesses often turn to commercial loans, or small business financing, to do the same thing. Although the commercial loan a large company might use and the loan for a small business might differ in scale, access to capital is an important consideration for any business.
The last several years have seen a lot of changes in small business financing. While overall access to traditional financing from a bank or credit union has become more difficult for some small business borrowers, it can still be a viable option for many others. And fortunately, there are also options for those who don’t find success at the bank.
A Traditional Small Business Loan
The local bank has traditionally been the first place most business owners look when they need a commercial loan. It makes sense; they have their business checking account, maybe a savings account, and possibly even a business credit card there. Unfortunately, it’s not uncommon for a business owner with a profitable business to get turned away at the local bank.
The banker may be looking for a fairly narrow borrower profile. Frequently, they are looking for businesses with annual revenues of $1 million or more, several years in business, collateral to secure a loan, a business owner with a personal credit score of 680 or better, and larger loan amounts. A business owner who meets those criteria will likely have success at the local bank—provided a traditional bank loan makes sense for their business.
The Correlation Between Access and Interest Rate
Depending upon the lender, the loan purpose, and the loan amount, a commercial bank loan will likely include a lower interest rate and come with a longer term than other loan types. This could be a good fit for many loan purposes including the purchase of commercial real estate, funding a large expansion project, purchasing equipment that will be depreciated over many years, along with many other longer-term financing needs.
When looking for a small business loan, it’s important to understand how ease of access impacts the loan cost. In other words, the interest rate will typically increase or decrease as the ease of accessing (or qualifying) gets more difficult or becomes easier.
For example, the interest rate on a bank loan can frequently be lower than many other loan types, but will include more rigid qualifying criteria. This makes it important to weigh the value of access verses a lower interest rate in some circumstances—this is true even for very creditworthy borrowers who would otherwise qualify for a traditional commercial loan at the bank but their loan purpose doesn’t give them the luxury of time required to wait for a traditional bank loan.
A Lower Interest Rate Loan Isn’t Always the Lowest Cost Loan
Sometimes a low interest rate might not equate to the lowest interest cost. This can be true when comparing a long-term lower-interest-rate loan with short-term financing. As a general rule, a short-term loan will have a higher periodic payment, but a lower total interest cost of the loan when compared to a longer-term loan—even if that loan includes a lower interest rate, because the business is paying interest over a longer period of time. Depending upon the loan purpose, a short-term loan, even a loan that might include a higher interest rate, could be a good choice. Loan purposes that might fit in this category could include purchasing inventory that will be sold in short order, launching a marketing campaign, or filling a seasonal short-term cash flow gap.
In addition to comparing interest rates, it’s important to consider the loan term and the total interest cost of the loan to determine which is the best fit for any particular loan purpose. For example, most people would never purchase a new car with a 30-year auto loan—even if that loan included a low interest rate. Depending upon the loan purpose, there are times when a long-term low-interest loan might not make sense.
Where Do Online Small Business Loans Fit?
Not too long ago, online business loans were a second choice to the bank by borrowers who didn’t meet the bank’s strict qualifying requirements. Today, many small business owners make an online small business loan their first choice. The reasons include:
- A streamlined application process
- Faster access to capital
- A willingness to work with younger businesses—For example, OnDeck only requires 12 months in business
- Less reliance on a personal credit score, focusing instead on fundamental business health
- They are willing to work with smaller businesses and smaller loan amounts
- Most online lenders don’t require specific collateral to secure a loan (though may place a general lien on corporate assets)
- Loan products better suited for many shorter-term small business financing needs than those offered at the bank
Depending upon the lender, the creditworthiness of the borrower, the loan purpose, and the loan type, online lenders offer a variety of potential loans to small business owners—short- and long-term loans along with lines of credit to meet a variety of business needs. What’s more, the cost to borrowers is coming down. Interest rates may be as low as 5.9 percent for highly qualified borrowers at OnDeck.
Online lenders, like OnDeck, look at your business differently than more traditional small business lenders that heavily weight the value of your personal credit score when they evaluate your business’ credit worthiness. Personal credit score is still part of the equation, but we also look at other indicators to evaluate the health of the business and the business’ creditworthiness. Time in business, cash flow, and other data can be part of the equation. Looking at a business this way allows us to say “Yes” more often. Approval often only takes a few minutes and funds are often delivered as fast as within 24 hours.
OnDeck is a Great Choice for a Small Business Loan
- Applying for an OnDeck loan is simple and fast
- We’ve already delivered over $4 billion to small businesses
- OnDeck is a publicly traded company with a Better Business Bureau rating of A+
- We make loans from $5,000 to $500,000