You’re just out of school, and you want to start your business. Or, you already have a business and you want to take it to the next level. Maybe you’re facing a cash flow problem and are going to have trouble making payroll or paying your utilities. Whatever the reason, there comes a time when just about every small business needs a loan.
Never before has there been so much choice for your business financing. With the internet, you can be connected to lenders all over the world who are looking for clients. However, you need to make the right choice for your business and your circumstances. There are several factors to consider. Here’s how to choose the right type of lender for your business.
What Are Your Needs?
Before you go looking for lenders, it’s important to identify what your needs are. Is it for a short term cash flow issue? A big investment? Or are you just starting out and need startup funding to get your business off the ground? All of these needs are different, and you might use different products to cover them. Then you choose your lender based on that need. It’s important to know the answers to these questions:
- How much do I need?
- How quickly do I need it?
- How healthy is my credit?
Once you answer those questions, it will go a long way towards making your choice. These are the two major types of lender.
An online lender is one that operates primary, you guessed it, online. You must have a full understanding of online loans before you make your decision. Online lenders are not simply banks that have a website. They cater to specific businesses with specific needs. Specifically they are a great option for businesses that can’t qualify for a traditional loan. If you’re just out of school and want to become an entrepreneur, then you may opt for the online lender route. You don’t have much of a history, and you may not have many assets. You also aren’t pulling in any revenue.
They also pay out the funds much faster than traditional loans. Most online funders have an automated system that approves borrowers within minutes. The application may have to go to a human for certification, but you can have the money in as little as a day. That is perfect if you have a quick cash flow problem and need the cash right away.
With lower application standards and a higher approval rate, there is a lot to like about online lenders. However, they also tend to come with higher interest rates because of those factors. There also used to be a concern that they were new and not as well-established. However, online lending is a growing industry, so this concern seems to be fading away. It’s up to you to decide if these pros and cons make it worth it. Many businesses decide that it does, because they wouldn’t get the loan otherwise. Only lenders make it easier for you to follow your dreams, even if you don’t necessarily have the startup funds to do it.
Traditional lenders tend to be established banks and financial institutions. For a long period of time, they were your only options for getting business financing. However, even with the competition from online lenders, they can still afford to be selective with who they lend money to. They tend to have higher standards. You might have to have several years of history of being in business, show growth in that time, and have a solid credit score. Since they are more discerning, they are taking on less risk. As such, they can afford to have lower interest rates.
Of course, lower interest rates are good, however, if there is a part of your profile that doesn’t meet their standards, the rate can go up. Also, traditional lenders are not as speedy with getting you your funds as online lenders are. You are taking a chance if you need cash right away. Plus, they are harder to get approved for, so you might not get your funds in the end.
However, traditional lenders can also help in other ways. They are able to offer products that online lenders typically can’t. They can offer business credit cards and merchant services, for instance. If these are valuable to you, then you may choose this kind of lender.
As you can see, choosing a lender involves considering several factors. If you need the cash fast, then an online lender is the way to go. If you have a good credit and have a thriving business, then you may want to go with a traditional bank. The choice is up to you.