One problem that may arise when running an online business is financing your small business. This is considered one of the major hindrances, as borrowing from traditional banks becomes a hassle. This is where different types of online small business loans come in.
Even if you do get a loan from a traditional bank, the process after that is tedious. Moreover, the repayments and the loan terms are not suitable for an online business structure.
This is a significant problem because this leads to discouragement and many people opt out of online business. Moreover, many online businesses fail or end up closing down due to these financial biases or exclusion.
This is because many online businesses are seen as riskier or somewhat seasonal in nature. For example, such businesses may face issues in making repayments during the low return periods.
Financing or raising capital is an integral and crucial factor to a business, be it online or physical. Hence, such challenges pose a high threat to businesses and their scalability. Therefore, according to studies, it has been seen that around 90% of ventures fail in their initial years.
Furthermore, even if they do succeed and move past their initial years, still, at some point, these businesses do require some sort of capital. However, although these traditional routes might not be of much help to these (not so traditional) online businesses, other options have started popping up.
There are many types of online small business loans. Here we will outline 4 small business loans that might be an excellent replacement for banks and fulfill online business’ financial needs. And while we won’t cover lending options like SBA loans and traditional loans, they’re still great options if you have access to them.
1. Crowdfunding
Not one of the typical small business loans, but crowdfunding basically means collecting or raising money in small amounts from a large number of people. There are various types of crowdfunding; let’s have a look at them. One of the main crowdfunding platforms is KickStarter.
Debt Crowdfunding
This is when people give money with the promise that the payments will include interest and the original amount borrowed.
Equity Crowdfunding
This is when people who lend money are given a share in the business.
Reward Crowdfunding
Reward crowdfunding is when people providing financial help are rewarded with free products or services from the business itself. It is a way of showing gratitude towards the investors.
Donation Crowdfunding
As the name suggests, there is no reward for the investors in this. Instead, these investors fund these businesses just to help out a budding venture.
2. Lending through Peer to Peer (P2P)
This small business loan method involves investment in the form of loans from investors. This method is banking-free and is usually done over the internet, leading to reduced transaction costs. Getting your loan approved for this type of borrowing is much easier than the traditional methods of banks. The policies and terms in this method are also relaxed and much more feasible for online businesses.
One disadvantage that might pop up for this method would be the fixed schedule of repayments. This might be difficult to arrange due to the fluctuating turnover rate of online businesses.
3. Accounts Receivable Financing
This small business loan method allows online entrepreneurs to receive an undetermined amount of money in advance. The amount provided is based on the estimated expenses that a business might incur in the future. Thus, this is a somewhat reliable source of financing with immediate access to money.
4. Angel Investors
In this method, businesses have to pitch their idea to experienced and potential investors. However, pitching plays a crucial role as the grant money totally depends on the entrepreneurs convincing skills.
Hence, preparation for the pitch is the key to securing a reasonable amount.
One should try their best to get a good amount from this method of online small business loans, as angel investors provide convenient loans. Moreover, since these investors are experienced individuals, they can also help entrepreneurs by giving free advice, counselling, and networking.
FAQ
What is an Online Business Loan?
Online small business loans are loans processed entirely online, from putting in the request to receiving it. As a result, these loans turn out to be more feasible, flexible, and faster when compared to those given by traditional banks. Moreover, the requirements for such loans are more; it includes checking factors such as credit card sales, revenue earned, and the duration of the business.
What are the Challenges With Small Business Loans?
Though this method may seem easy and convenient, there are certain disadvantages to it. So, just like in traditional banking, the borrower needs to have a specific credit score. Similarly, some online banks may require a minimum credit score for online loans or evaluate business credit.
This is checked to see if the business has any negative factors like tax evasion or undisclosed loans. Moreover, another challenging aspect can be that it overall can be more costly than the traditional means. It can have very high interest rates.
How Do Online Small Business Loans Differ From Traditional Means of Loans?
Going for online loan options or a traditional loan is and should totally depend on the nature of your business and the needs and requirements. However, the differences between the two means are outlined below.
- The cost of online bank loans is usually higher when compared to traditional bank loans. However, qualifying or getting approvals for loans through online means is much easier and quicker
- Repayment schedules vary. Usually, just like traditional loans, online bank loans’ repayments are also levied every month, but some loans have schedules spread out on a weekly or daily basis. This might be inconvenient for some businesses. Hence, it is important to know these formalities and policies beforehand to make an informed decision
- Online loans are quicker in terms of approval. So, if you need cash on an urgent basis, it is highly recommended to go for online means rather than traditional ones. Traditional banking is slow and may take months to give you a response, online lending, on the other hand, may take just a few days
- The application process may also differ for both methods. For example, in online lending, the lenders usually check the business’s financials by requesting you link business checking accounts. Through this, they can view business activities, balances or revenue, etc. Hence, having a business account is necessary for online lending to be possible.
Recommendations for Small Business Loans
Gust is the world’s largest startup network, with over 85,000 investment professionals on its platform. It has a good record of performance benchmarks and has helped many small businesses. It is more than just funding as it provides for starting up your business, growing it as well as raising capital.
What We Like
You can compare your startup's team and progress to thousands of data points and surface opportunities to improve.
AngelList is a US website for start-ups and angel investors. It was founded in 2010 to democratize the whole investment process. In addition, the aim is to help in overcoming challenges faced by entrepreneurs in financing their start-ups. You can also fund start-ups as a portfolio set up and find start up jobs on this platform.
What We Like
Even ventures that have high-risk are more than welcome at AngelList.
Ondeck is a financial platform that comes fully loaded with technology, providing online small business loans and financial help to small or medium scale businesses.
What We Like
The cost to borrow becomes less for repeat customers.
This is a platform for commercial loans and mortgages. They have partnered with numerous institutional investors to provide an array of financial options and online small business loans.
What We Like
No transfer of ownership at all.
Go Kapital grants real estate financing and business loans to entrepreneurs or investors globally.
What We Like
Once a loan is approved, working capital can be accessed really quickly.
Conclusion
Times are changing! With more online and eCommerce businesses popping up, so are the small business loan options, solutions and services related to them. This is evident from the fact that more financing options and alternatives to traditional banking are in place. One of the most common is mobile banking. All these solutions and services are there to cater to the online segment’s needs. This makes the whole online business process more accessible.
