It’s the “small” in your small business than can torpedo your efforts to find funding.
“Banking became conservative after 2008, and they became really restrictive in loans they were willing to give,” says Carolyn E. Predmore, a marketing professor and faculty moderator for the entrepreneurship club at Manhattan College in Riverdale, New York.
She says small businesses, even with excellent credit, are often too small to get the funding, and as a result, alternative lending options have grown quickly.
OnDeck and Lending Club are two of the largest online lenders for small businesses, and both are fast-growing public companies. OnDeck has funded $3 billion in loans since its inception in 2007; Lending Club has funded more than $7 billion (includes personal loans) since launching the same year.
When tight lending restrictions commonly found at financial institutions spur you to look elsewhere, online options such as OnDeck and Lending Club can answer the need for easily accessible small-business capital. The loans are often faster and easier to obtain, but they also can come at a higher price. Here’s a closer look at your options.
When a bank loan is not the answer
“There’s this misperception that alternative lending is for bank turn-downs or subprime borrowers, but it’s really not that at all,” says Brett Baris, president of Credibility Capital, a small-business loan marketplace partnered with Dun & Bradstreet.
“It costs the bank too much money to actually find the customer, underwrite the loan, process the loan, close and service it,” Baris says. “They’re spending the same amount to close a $50,000 loan as a $500,000 loan, so the economics don’t make sense.” This means small businesses often seek amounts too small for banks to underwrite, he says, even if they have a great track record.
You may also be too busy for a bank loan. “If you start your own business and are working around the clock, you don’t necessarily have time to go through the process with the bank, which could take weeks or months,” Baris says. Online lenders offer the convenience of a relatively quick decision and access to capital.
If you’re not in a rush, you may still want to apply for a bank loan, even if you think you’ll be denied, Predmore says.
“Loans are an outside person evaluating your business,” she says.
Go to your banker and learn their concerns about your business, then use their objective evaluation to address business issues. If you’re rejected, then look into online lenders, but treasure what you learned in the process.
How OnDeck and Lending Club work
Although the business models and products for OnDeck and Lending Club are very different, both feature quick online applications that get approved and funded within days.
Lending Club is a peer-to-peer marketplace, matching individual investors with borrowers. Experts say hedge funds and banks are also now investing in these loans. The majority of Lending Club loans are personal loans, but the company offers small-business loans up to $300,000. Terms are one to three years, and payments are made monthly. For small-business loans, interest rates range from 8% to 32% APR, depending on credit and business financials.
OnDeck is not a lending marketplace, so loans are backed by companies and organizations rather than individuals. It offers small-business loans only, ranging from $5,000 to $250,000, for terms from three to 24 months. Borrowers can make payments on a daily or weekly basis. The company also offers business lines of credit up to $20,000. OnDeck claims its rates start as low as 10%, but a May 2015 investor presentation revealed an average APR of 49% on term loans.
Know the criteria
Just because online lenders offer easier approval than bank loans doesn’t mean they’ll approve everyone. You must have good credit with solid income and revenue.
Additionally, most alternative lenders won’t underwrite businesses younger than a year, Baris says. If your business is a startup, he says, consider looking at personal loans, credit cards or other types of financing until you’re more established.
Predmore also recommends objectively evaluating your business and ensuring you’re in the right financial situation to borrow. “Make sure you have a stable income that will be able to cover your loan payments,” she says.
Be aware of costs
Although online lenders might be faster and convenient, you may pay the price in high rates. “It costs a lot to find a borrower, so a lot of those costs are passed down to the borrower,” Baris says.
For OnDeck, he says, the costs of financing can be high because of those costs to acquire small-business customers. An OnDeck investor presentation indicated that the typical acquisition cost in the first quarter of 2013 was $5 per customer, which consisted of commission and direct marketing to businesses. It’s less problematic for Lending Club, Baris says, since it’s more focused on consumers.
There’s also an origination fee for both lenders. OnDeck charges a 2.5% fee on your first loan, a 1.25% fee on your second and none on additional loans. Lending Club charges anywhere from 0.99% to 5.99% in origination fees.
“You need to figure out the rules, what they will charge you and what that means in terms of what you request,” Predmore says. She says some people are shocked when they get less than they asked for, but they didn’t factor in fees.
Loans from online lenders can be worth it if you’re looking for money quickly and don’t mind paying the price.
NerdWallet has come up with a list of the best small-business loans to meet your needs and goals. We gauged lender trustworthiness and user experience, among other factors, and arranged them by categories that include your revenue and how long you’ve been in business, so that you know which loans you qualify for.
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