Borrowing Online

Choose carefully when deciding on a lending source.

In today's world, small business owners have increasing demands put on their time from customers, employees and suppliers. Because of this, they are constantly in search of ways to be efficient with their time to accomplish more each workday.

One way that business owners save time and increase efficiency is through the use of online business services. Increasingly, this includes online banking services to facilitate monitoring checking accounts and borrowing funds online from lenders. Many business owners are seeking financing online and have several choices in the digital borrowing marketplace. Increased choices also lead to increased confusion and uncertainty regarding the best way to borrow for their business needs.

Business owners are looking for speedy, convenient financing but may inadvertently pay more than they need to for business financing–especially as they shop for loans online. Small businesses should shop around based on the lender's funding model, terms and rates before applying for their next business loan.

Of the borrowing choices available online, there are three business lender profiles: peer-to-peer, non-traditional direct, and traditional (bank) direct lenders. Each profile has specific benefits and drawbacks to potential borrowers, and all should be considered when selecting an online lender.

Peer-to-peer lenders are funded by individuals and tend to be the most flexible in terms of underwriting criteria (credit score, cash flow, collateral, etc.) and dollar amount funded (peer-to-peer lenders often finance small loan amounts). What peer-to-peer lenders make up for in flexibility, they tend to lag in response time and rate. This is because their lending model works to pair individual lenders to business borrowers. They also tend to have tighter repayment terms in the form of short loan amortizations (generally 1-5 years), which may not work for some businesses. Business financial statements are often required by peer-to-peer lenders.

Non-traditional direct lenders also provide underwriting flexibility and lend to different business types depending on the lender's model. Loan funding sources are generally from lines of credit and investors, which carry a lower cost of funding than peer-to-peer lenders. This makes funding more plentiful and turn-around time tends to be the quickest of the three types of lenders. Decisions are often made via a loan algorithm and require that the business share limited financial information with the lender (usually by sharing online banking or accounting software credentials) and factor in more traditional bank underwriting criteria (cash flow, collateral, credit, etc.) when deciding on a loan. Because funding is from lines of credit provided by banks and other sources, non-traditional lenders' rates and fees can still be high. Also, repayment terms are somewhat short and inflexible as lenders work to match short-term assets (business loans) with short-term funding (lines of credit). Detailed financial information is not generally required outside of collected online information, which is a big factor in the quick turnaround time on loan decisions.

In many cases, traditional direct lenders are still working to provide online business loans. Some have adopted online applications while others have eschewed them in favor of in-person applications. Traditional direct lenders rely most heavily on tried and tested underwriting models but may combine them with speedier models for loans under a certain threshold, say $100,000 or $250,000. Traditional lenders are a business's best bet for the lowest rates and fees but may take longer to decide on a loan. In most cases, traditional lenders request more financial information to make a loan decision. However, with this information, traditional lenders also have access to Small Business Administration (SBA) loan products which provide federal government assistance (in the form of a guarantee or loan debenture) to obtain a loan, keeping the cost of borrowing down.

Borrowing online can be a time saver for business owners. However, taking a few extra minutes to investigate your options may be the best way to make sure you get the right loan structure from a trusted lender. Online lenders are not all created equally, but it is the small business owner's job to navigate the choices and select the best fit with their business's particular needs. Local lenders stand at the ready to help as well if a business's unique need is not met by the “one size fits some” model of the online lending marketplace.

Jonathan Hildebrand is a vice president and manager of small business lending at Centier Bank. He works and lives in Valparaiso.