Alternative online lenders want you for a customer. That’s why when you Google “small-business loans,” you’ll see paid search results for a host of online lenders including Kabbage, OnDeck and Lending Club. You might also see advertisements on TV for online small-business loans, as well as on your Facebook feed and even in your mailbox.
Small-business loans “don’t just sell themselves,” says Richard Swart, a scholar-in-residence researching crowdfunding and alternative finance at the University of California, Berkeley. “They rely highly on a sales force.”
OnDeck and Lending Club — the only two publicly traded small-business online lenders — increased their spending on sales and marketing by about $8 million and $21 million, respectively, in the second quarter of 2015 compared with Q2 of 2014, according to the companies’ most recent public filings. In April, OnDeck became an official sponsor of Minor League Baseball as the company ramped up efforts to grow its business and become a household name.
But just because online lenders are eager to lend to you doesn’t necessarily mean you should borrow from them. Do some digging and seek out all your options — even the less-advertised ones — before you make a decision. For instance, take a look at these small-business loans you may not have heard of.
“Any smart entrepreneur looking for capital is going to explore all of his or her options,” Swart says. Here are some tips on sizing up your choices.
How to compare small-business loans
When comparing small-business loans, look at cost, term length and the type of loan, and match those factors with your business’s needs and its ability to repay.
Cost: Annual percentage rate is one of the best ways to compare loans on an apples-to-apples basis. APR takes into account interest rates plus any fees you’re required to pay. Many online lenders, however, don’t include APR on their websites — instead, they’ll express the cost in interest rate or cents per dollar borrowed. We’ve tracked down the APRs for several of the biggest online lenders and included them in our lender reviews.
Term length: You should also compare loans based on term length, because it could explain differences in APR. For online loans, shorter terms tend to have higher APRs, and longer-term loans have lower ones, says Mitchell Weiss, a financial consultant and executive in residence at the University of Hartford.
Match your use of funds with an appropriate term length. For example, if you need a loan to carry your business through a cash-flow gap, you’ll want a short-term loan. If you’re purchasing equipment, renovating your space or launching a new product or service, look for a loan with a longer term.
Type of loan: Depending on why you’re borrowing, some types of loans are better than others. For example, if you need to finance recurring purchases, such as inventory, a line of credit is a good option because it’s cash available when you need it, but you pay interest only on what you borrow. If you collect payments in invoices and need cash before your customers pay you, accounts receivable financing is for you. For one-time purchases, you’ll want a term loan because you can borrow one sum of cash and repay it over time.
The bottom line
As online lending grows in popularity, you’ll likely see online small-business loans advertised on TV, social media, Google and even through snail mail. But don’t choose a lender based solely on name recognition. To get the best small-business loan for your business, consider all your options and compare loans based on price, term length and the type of small-business loan you need.
Find and compare small-business loans
NerdWallet has come up with a list of the best small-business loans to meet your needs and goals. We gauged lender trustworthiness, market scope and user experience, among other factors, and arranged them by categories that include your revenue and how long you’ve been in business.
To get more information about funding options and compare them for your small business, visit NerdWallet’s small-business loans page. For free, personalized answers to questions about financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.
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