One of the most flexible financing options for small businesses is a loan from an online lender. Known for their accessibility and speed, online loans are a great solution for business owners who want convenient applications and fast funds. 

But not every online lender is alike. If you’re considering applying for an online loan, this guide is for you. Keep reading to learn more about what online lending is, how it differs from bank lending, and how to choose the right online lender for your business needs.

What is Online Lending? 

Online lending is an umbrella term that refers to loans issued outside of a traditional financial institution like a bank. Most online lending is considered marketplace lending, which means it takes place on public and private platforms that connect business owners with investors. 

Online Lenders vs. Banks

Online lenders and banks offer different loan products, lending terms, and funding experiences. Many online lenders tend to specialize in one or two types of loan products — like a business term loan or line of credit — while banks generally provide a range of financial products, including term loans and business credit cards. 

The qualification requirements for online loans are usually more relaxed than the qualification requirements for bank loans. Many banks want applicants with credit scores of 680 or higher, at least two years of operating history, and annual revenues above $250,000. In contrast, the average online lender wants applicants with credit scores of at least 600, at least six months of operating history, and an annual revenue of $100,000. 

However, since online lenders have less rigid qualifications for loan approval, they often come with tighter loan terms. In addition to approving smaller borrowing amounts for loans, online lenders may also have higher interest rates and shorter repayment periods than banks. 

As an example, the average small business loan amount from an online lender is $50,000 to $80,000, compared to around $600,000 from a large bank. As for interest rates, the average APR for an online term loan has a wide range of 11-44%, compared to annual interest rates of 3-13% for a bank loan. 

Another key area where online lenders and banks differ is timing. With online lenders, you can apply for a loan online with just a handful of documents, then get a decision within days or sometimes hours. Banks, on the other hand, tend to have lengthier application processes and turnaround times that range from two weeks to several months. 

Pros and Cons of Online Lenders

Like any form of financing, online lending comes with unique benefits and drawbacks. The biggest appeal of an online loan is the ease — but the biggest drawback is the potential of a higher interest rate. Here are some more pros and cons to consider: 

4 Qualities to Consider in an Online Lender

Online lending is a large market, and not all online lenders are created equal. Loan products, eligibility requirements, application processes, funding terms, and customer service policies all vary depending on the lender. That’s why it’s critical to do your due diligence before choosing an online lender to partner with. 

Here are four characteristics to keep in mind when looking for an online lender: 

• Accessibility: What do you need to qualify for a loan? How available is the lender by phone or messaging to ask questions? 
• Flexibility: Does the lender offer a healthy borrowing range and repayment period? Do they have prepayment penalties? Do they accept a variety of different loan uses?
• Speed: How quickly can you expect to hear back once you apply? How fast can you get funds in your bank account?
• Affordability: How affordable is the annual percentage rate (APR)? On top of the interest rate, what kinds of fees can you expect to pay? 
• Dedication: How helpful is the lender’s customer service before, during, and after applying? What will your interactions with the lender look like? 

How to Choose the Right Online Lender for Your Business 

The right lender for your business depends on a handful of different factors, including your business goals and current finances. If you’re not sure where to start, here are five steps to take:

1. Establish your business goals

Clarifying your business goals can help narrow down your lender list. Do you want to hire a new salesperson in the next quarter? Open a second location in two years? Replenish your inventory ahead of a busy season? 

Take some time to reflect on your short and long-term goals, then think about which type of funding can help you get there. 

2. Determine how much money you need to borrow and when

Spend some time poring over your business finances and crunching numbers to determine your borrowing sweet spot. Knowing the amount you need, what you need it for, and when you need it is key to finding a lender that can accommodate you.  

3. Do your research

Conduct thorough online research and ask fellow business owners for their input with different online lenders. From there, create a shortlist of three to five online lenders that offer the loan product you want, and have borrowing amounts, terms, and timelines that fit your needs. 

4. Double-check APRs and terms

Spend some time digging into the details. Some online lenders have sky-high APRs when you account for all the fees, and others have more affordable rates. Some online lenders require personal guarantees, and others ask for collateral. 

It’s crucial to get a better idea of what your loan will actually cost you by double-checking the fees, rates, and repayment terms. You can usually find this information on a lender’s FAQ page or a loan comparison site. 

5. Read reviews

Testimonials and customer stories offer great insight into an online lender’s expertise and customer service. After you explore a lender’s Google reviews and onsite testimonials, it’s also helpful to read the customer service policies they outline on their websites. 

Find an Online Lender You Trust

No matter what kind of funding you’re looking for, Nav can help you find the right kind of financing for your small business needs. Based on your business data, we can provide financing options that you’re most likely to qualify for, like small business loans, business lines of credit, and business credit cards. 

If you’re looking for an online lender that offers fast, flexible, and affordable financing, Funding Circle may be a good option. Funding Circle’s business term loans are designed to help small businesses gain financial stability or grow. Learn more about Funding Circle’s funding solutions or apply for a term loan today.