What is an online business loan?
An online business loan is generally offered by nonbank lenders, also called alternative lenders. Unlike banks or credit unions, which may require you to visit a branch to complete the financing process, alternative lenders typically process and fund small-business loans entirely online.
Online business loans are usually fast to fund, with more flexible qualification requirements than other types of business financing. Some online business lenders work with startups or businesses with bad credit.
Speed and flexibility come with a cost, however. Online business loans tend to have higher interest rates than bank or U.S. Small Business Administration loans. Annual percentage rates for online loans range from 6% to 99%.
Many online lenders don’t require collateral — pledged assets such as real estate, equipment and unpaid invoices that can be seized by the lender if you don’t repay the loan. However, offering collateral may help you access lower rates and better terms.
Online loans can require weekly payments and also have lower maximum funding amounts and shorter repayment periods than bank loans — although terms ultimately vary by lender.
Types of online business loans
There are several types of online loans that you can use to finance your small business. Here are some of the most common options.
Business term loans
Small-business term loans provide a lump sum of cash that you repay, with interest, over a fixed period of time. Some online lenders offer short-term loans, with terms of 12 months or less — while others offer longer repayment terms of seven years, for example.
Because you can repay business term loans over an extended period, these online loans are usually a good choice for larger investments and long-term growth.
Business lines of credit
A business line of credit allows you to draw funds as needed up to a set limit and only pay interest on the money you’ve borrowed. You repay the funds over a specific period of time, typically on a monthly or weekly schedule.
Compared with term loans, business lines of credit are a more flexible form of financing — making them well-suited for managing cash flow, covering payroll and other short-term needs.
Equipment financing
Equipment financing is a type of small-business loan designed specifically for the purchase of machinery or equipment. Equipment loans are often structured as term loans — with repayment periods based on the anticipated life of the equipment you’re looking to buy. Depending on the equipment, that could mean loan terms of a year to up to 10 years, potentially.
With equipment financing, the equipment you purchase serves as collateral on the loan, which means you may not have to rely as heavily on your credit or financial history to qualify.
Invoice financing and invoice factoring
Invoice financing allows you to borrow money against your outstanding invoices. A lender gives you a percentage of your unpaid invoices upfront in the form of a loan or line of credit with the invoices serving as collateral. Once your customer pays the invoice, you pay the lender back the amount borrowed, plus fees and interest.
With invoice factoring, on the other hand, you sell your outstanding invoices to a factoring company at a discount. The factoring company then collects payments from your customers directly.
Both of these types of financing are good options for business-to-business companies that need to cover cash flow gaps. Invoice factoring and financing can also be easier to qualify for than other types of business loans — but may have higher interest rates.
Merchant cash advances
A merchant cash advance, or MCA, provides you with a lump sum of capital that you repay using a percentage of your future credit and debit card sales, plus a fee. A merchant cash advance isn't technically a loan — instead, an MCA company is buying your future sales at a discount.
Although merchant cash advances are fast to fund and easy to qualify for, they’re one of the most expensive forms of online business financing. You'll want to consider all other options before turning to an MCA.
Pros and cons of online business loans
Pros
Convenience. Online business loans offer you the ability to apply for funding without having to leave your business. While emails, phone calls and faxes may be used to complete the online application process, you won’t need to visit a branch location.
Fast to fund. While bank and SBA loans can take weeks to fund, some online business loans can provide capital in as little as 24 hours. And even if you don’t receive a loan that quickly, many online lenders offer funding within days.
Streamlined applications. Online business loans often offer streamlined application processes with minimal documentation. While traditional lenders tend to rely on a manual review system to evaluate loan applications, many online lenders leverage technology so that they can underwrite your business more quickly and provide a faster application decision.
Variety of loan options. There are many different types of online business loans available — depending on your business size, funding needs, qualifications and more. Among these choices, small-business lenders offer a range of interest rates, repayment terms and loan amounts, so you can compare your options to find the right loan for your business.
Flexible qualification requirements. To qualify for a business bank loan, you’ll generally need strong credit and several years in business. With online business loans, on the other hand, qualification requirements are typically more flexible. Lenders may consider factors other than your personal credit score, time in business and annual revenue when evaluating your application. Some lenders will also work with new businesses or those with bad credit.
» MORE: Best startup business loans for bad credit
Cons
Can be expensive. Because online business loans are faster to fund and easier to qualify for — and therefore pose greater risk for lenders — they will generally be more expensive than bank and SBA loans. While the average business loan rate for banks ranges from about 5.89% to 12.23%, APRs for online loans can vary anywhere from 6% to 99%. And APRs for merchant cash advances can reach even higher — up to 350%.
Limited person-to-person interaction. Although some online lenders offer phone-based customer support, you’ll typically complete the entire loan process online — meaning you may not interact with anyone from the lending company. If you’re looking to build a relationship with a lender or have someone address your questions one-on-one, an online business loan might not be the best option for you.
Security risks. There are a multitude of reliable online lenders on the market, but there are also bad actors that are looking to take advantage of small-business owners. These predatory lenders are often trying to trap businesses with offers that seem too good to be true, especially if those businesses are having trouble finding financing elsewhere. You can avoid these business loan scams by thoroughly researching and vetting an online lender to make sure they are reliable and trustworthy.
How to apply for an online business loan
Although loan applications vary from lender to lender, you’ll typically be able to apply for an online business loan within minutes. Here are the steps you can follow:
1. Understand your financing needs
You’ll want to determine how much capital you need, how much debt you can afford and what type of loan is right for your business.
2. Evaluate your qualifications
Most lenders will look at your personal credit score, time in business and annual revenue when underwriting your loan application. Online lenders may also look at your cash flow, financial accounts or outstanding invoices. You’ll want to review your business qualifications ahead of time so you know where your company stands. Also, you may want to estimate the value of any assets you plan to offer as collateral for your loan.
3. Compare lenders
You should explore and compare multiple lenders to find the best fit for your needs. This includes reviewing factors such as interest rates, fees, repayment terms and prepayment penalties. A business loan calculator can help you understand the total cost of a loan when comparing lenders. You’ll also want to research the lender and read reviews to make sure they’re reputable.
4. Submit your application
With most online lenders, you should be able to complete and submit your business loan application in minutes. Some lenders have you fill out a simple form and connect your financial data to their system so that they can evaluate your business information more quickly and provide a faster application decision.
You may also, however, need to provide financial documentation, such as:
Business and personal tax returns.
Business and personal bank statements.
Business financial statements (e.g., profit and loss statement, balance sheet).
Additionally, your lender may secure the loan by taking out a blanket lien on your business assets — and you’ll likely be required to sign a personal guarantee.
5. Review your loan agreement and receive funds
Online lenders typically fund business loan applications within a matter of days. Some lenders offer funding in as little as 24 hours. Before signing a business loan agreement, make sure you review the terms and conditions and talk to your lender if you have any questions.
Find the right business loan
The best business loan is generally the one with the lowest rates and most ideal terms. But other factors — like time to fund and your business’s qualifications — can help determine which option you should choose. NerdWallet recommends comparing small-business loans to find the right fit for your business.
Predatory lenders do exist online, however, looking to take advantage of small businesses. Watch for these red flags: Lenders that guarantee approval, make you pay a fee upfront or don’t have a physical address.
