How the Internet Has Changed the Small Business Loan

For businesses who qualify, a small business loan acquired through and guaranteed by the Small Business Administration is almost always the best bet, ensuring good terms, a low interest rate and reasonable payments. But what if you can’t get an SBA loan?

For businesses who are expanding rapidly, timing may be everything. As the saying goes, “he who hesitates is lost,” and for a small business on the verge of becoming a big business, plodding through the slow and onerous process of applying for a small business loan could put the kabash on a lucrative expansion opportunity. So what’s a small business owner to do?

Funding Sources on the Internet

There are a number of funding sources to be found on the Internet, two of which we’ll cover here, that offer lines of credit to small business owners through unconventional means. That is to say, they tend to use different algorithms for making lending decisions than traditional institutions, and have nontraditional weekly payment schedules. They are also easier to apply for, and provide decisions — and funding, within days rather than weeks or months.

OnDeck Business Loans

Based in New York City, OnDeck is not a bank, but a lender backed by several venture capital firms, including RRE Ventures and Khosla Ventures. OnDeck business loans are financed by a $100 million credit line from a hedge fund. Unlike conventional small business lenders, OnDeck bases lending decisions on a business’ cash flow rather than on the credit score and personal assets of the business owner.

OnDeck’s proprietary software incorporates online reports from banks, credit bureaus and credit card providers, and reviews the past six months of the business’ banking records and sales history to make its decision, usually in about two days. An applicant must have been in business for more than one year and be bringing in at least $3,000 in credit card sales on a monthly basis. If the company does not accept credit cards, then it must have been in business for at least two years and have an average daily checking account balance of at $3,000 or more. Companies with lower sales prices and higher volumes are more likely to be approved for these loans, which average around $30,000 and must be repaid within a year.

While OnDeck’s loans are generally more expensive than a traditional loan or even a credit card, they are typically up to 50% less expensive than a merchant cash advance, and as of 2013, the company had funded more than a billion dollars in loans.

Kabbage Business Loans

Kabbage offers a fast, flexible business line of credit, which business owners can draw against as often as once daily for anything and everything. Lines of credit can be up to $100,000, and funds can be delivered in as few as seven minutes.

Like OnDeck, Kabbage approves business lines of credit by looking at real-life data rather than just credit scores and hard assets, and the process is quick and easy. Business owners can simply link any or all of the inline services they use, such as checking accounts, QuickBooks software, etc. in order to qualify. No filling out and faxing mounds of paperwork required.

Kabbage offers an unusual repayment scheme based on a six-month repayment schedule. Interest may be anywhere from 1% to 12% for the first two months, then drops to 1% for the next four months.

The Down Side

There is arguably a down side to everything, and these types of small business loans are no exception. While they may be easier to qualify for and quicker to get than a small business loan from a banking institution, they do cost more. They also require automatic weekly payments taken directly from your business checking accounts, which helps to guarantee the loan.

For businesses on the rise who need immediate financing to fund their expansion, inventory, payroll, etc., this type of financing can be a real boon despite the higher interest rates, as long as things are going great. Be aware, though, that should things start to go south, there is no way to unlink your accounts. The loan company will continue to collect the payments no matter what. The same cold, calculating algorithms that determine your loan qualifications will debit your accounts on schedule, no matter how many seemingly friendly and understanding customer service representatives you talk to. You may be a local business, but these lending companies are not.

When it comes to small business loans, today’s local business owner has many more choices than ever before. It’s important to explore all the possibilities and weigh the pros and cons to make the best decision for your local business.