Editor’s Note: This is a contributed post from Kabbage. Kabbage helps small businesses get the funding they need to grow with fast, online financing. Find out more here.
Access to business funding and online loans is a crucial component for small business survival.
This is true whether you are just starting out, experiencing growth in a slow business cycle, or need positive cash flow. Recently the small lending landscape has changed, in part because small business lending has not fully recovered from the financial crisis of 2008.
As a direct cause of the recession of 2008, traditional banks became more conservative in their lending practices to small businesses.
This left small businesses with little access to capital from traditional banking sources. According to an Intuit QuickBooks’ article, “only 39 percent of applicants received all of the cash they asked for when applying for a business loan.”
The good news for small business owners in need of loans?
Fortunately for small business owners, help arrived from alternative lending sources in the form of online loans.
The emergence of online loans offers relief to small businesses by providing them with business funding that has in turn boosted the economy. And according to a February 2016 Biz2Credit Small Business Lending Index report, the approval rate for alternative lending was at 60.8 percent.
That’s in contrast to the 22.8 percent approval rate from big banks.
It’s evident that online business loans are changing the environment for small businesses and have been vital to their success and growth.
Let’s take a look at the characteristics of online business loans and explore why small businesses are choosing them.
Automated Loan Approvals
The presence of alternative lenders and their use of software technology has transformed the end user experience.
If you need proof, just take a look at the current process for applying for a loan: business loan applications are now available online and via mobile applications.
After completing an online application, business owners can be approved in just minutes, which is in sharp contrast to small business loan applications made to traditional banks, which can take days.
Traditional loans additionally require a load of paperwork before approval is granted. The automated process of online loans makes it convenient for small businesses. Because small business owners normally need cash sooner rather than later, speed is a favorable benefit to using an online business loan.
Reviewing The Overall Picture
Alternative lenders such as Kabbage look at the overall picture of the business when reviewing an application.
Whereas a traditional lender looks at the personal credit history of the business owner, the number of employees, and industry trends — online lenders review the real life data of the business. This can include any online sales, banking transactions, and overall business performance.
For example, Kabbage allows you to link any of your online services to the application for review. This would include linking some of your electronic payment services such as PayPal, eBay, or Intuit QuickBooks.
It appears that alternative lenders who provide online business loans are more realistic in their funding processes because they realize that there is a variety of data that should be analyzed when considering an applicant’s request for funding.
For instance, a review of current cash flow and the performance of the business allows the lender to have a good snapshot of the business.
Most alternative online lenders provide funding to small businesses in the range of $500 to $100,000. Typically, the repayment terms are based on the loans being repaid within six months.
Online loans are a great solution for short-term expenses such as bridging the gap between accounts receivables and payables, short-term operational costs, and assisting with cash flow, inventory, and emergencies that may arise.
Most online business loans encompass a line of credit. Once you are approved, you can take what you need and save some cash for when you need it later.
This means that your business has the ability to choose how much you want to borrow. For example, let’s say you are approved for $50,000, but initially you only need $20,000. You can access the additional $30,000 worth of funds as you need them.
Jennifer Halstead, owner of Magna Health and Fitness, is an example of a small business owner who used this strategy. Jennifer is able to use Kabbage funds as she needs them; and with this access to funding, she has been able to sustain her business and continue to grow.
While tapping into a line of credit is not something new for businesses, the convenient, flexible way that small business owners can now apply and receive business funding certainly is.
If the current trends are any indicator, it’s safe to say that innovative alternative lenders are here to stay.
As part of the borrowing process, you should always borrow responsibly. Before you apply, make sure you do the following:
- Understand how you will allocate the funds: Before applying for a business loan, it is important that you understand why you need funding. For example, will you use it to stock up on inventory? Or perhaps for an advertising campaign? Answering these questions is important so that you will know exactly how much funding you need. Understanding where and why you need the funds is especially important if you choose not to use all of the funds right away.
- Understand repayment terms: As with any type of loan, it is important that you understand the repayment terms. This includes understanding the length of the loan and any rates that apply.
- Understand your options: It is important that you understand that although the playing field has gotten larger with alternative lending companies, not all online loans are the same. Take the time to learn what type of loan you are receiving and research the lender. You should find out if the lender is small business friendly and if the lender is an advocate for small business.
As you navigate through the application process, stay positive. The funding is there for your business — you just have to know the right places to look!
Over 100,000 small businesses have helped their business grow with Kabbage. Learn how you can get started and apply online here.