Online loans vs bank loans: How to decide what’s best for your business
There’s no shortage of financing options for business owners who need capital, but most of them fall into one of two categories: bank loans or loans from online lenders.
In 2020, 42% of small business owners applied for a loan at a large bank, 43% applied with a small bank, and 20% applied with an online lender, according to the Federal Reserve’s 2021 Small Business Credit Survey. Both types of lenders come with unique benefits and risks, so it’s important to figure out which one works best for you.
Most large banks require applicants to have credit scores of 680 or higher, at least two years of operating history, and annual revenues above $250,000. Many banks also want to know that your business is profitable and competitive.
Online lenders also look at your personal and business scores to determine eligibility, but they typically have looser requirements. The average alternative lender looks for a credit score of at least 600, at least six months of operating history, and an annual revenue of $100,000.
Though many banks are starting to embrace digitization, online lenders tend to have the fastest and most accessible application processes. With many online lenders, not only can you check to see what rates you qualify for without impacting your credit score, you can also fill out forms and upload documents straight from your mobile device or tablet.
Applying for a bank loan often requires scheduling a phone consultation and submitting a lot of paperwork (including a fully fleshed-out business plan), but online lenders usually only need a few different documents to get started.
The underwriting and approval processes are where banks and online lenders diverge significantly. Banks tend to have lengthier turnaround times, ranging from two weeks to several months just for an initial response. From there, many banks require follow-up conversations and additional documentation before reaching a decision.
Meanwhile, online lenders are built with speed and efficiency in mind. Most online lenders use technology to expedite the underwriting process, so you can get a decision on your application within days—or hours.
Because banks have more rigid qualifications for creditworthiness, they can usually offer business owners higher borrowing amounts, longer repayment periods, and lower interest rates. The average small business loan amount from a large bank is just under $600,000; for an online lender, the average amount ranges from $50,000 to $80,000. The average APR for a bank loan is 3-7%, and 11-44% for an online term loan.
Bank loans typically require you to secure your loan by putting up an asset—like your office building or savings—as collateral. Online lenders don’t always require collateral, but many do ask for a personal guarantee, which means personal assets like your house or car are on the line if you default on your loan.
A brick-and-mortar bank gives you the option of visiting in person to ask questions or get help. Plus, many banking institutions also offer legacy services and special offers to longtime customers.
With online lenders, the financing process tends to be more independent; much of the customer support you receive is through online channels like web messaging, email, and phone calls. However, some online lenders pride themselves on personalized customer service.
You can apply fast and get funds faster than a bank. The qualification requirements are less rigid. Many have a pre-qualification tool that lets you check your rates without damaging your credit score.
Interest rates are higher. There’s no option for in-person service.
You can get lower interest rates and larger borrowing amounts. You get in-person service and can develop a relationship with the bank to qualify for offers and opportunities.
The application process generally requires more paperwork. You need a higher credit score and proof of profitability to qualify. You may not get funds quickly.