Small Business Loans: Convenience and Capital

I’m not convinced there’s a one-size-fits-all business loan that meets the financing needs of every business. I do believe there are some pretty compelling reasons why online financing options are a good fit in certain circumstances:

1. Convenience: It’s no secret to any small business owner who has ever sat across the desk from their banker to apply for a small business loan—it is not a very convenient process. In fact, the often weeks long back and forth associated with a traditional small business loan application can be better described as decidedly inconvenient.

Online small business loans have, among other things, become known for a quick and convenient application process. This is particularly appealing to business owners who need capital quickly to take advantage of an opportunity to purchase inventory at a discount, ramp up for a new contract, or meet some other short-term need.

Many online lenders like OnDeck are leveraging technology to quickly evaluate a small business owner’s loan application—often in just a few minutes. And, once the application is approved, funds can be deposited in his or her business checking account as quickly as 24 to 48 hours.

2. Access to Capital: This is one of the biggest challenges facing small business owners today. Following the start of the recession, traditional sources of financing all but dried up. Karen Mills, the former Administrator of the SBA and now a Senior Fellow at the Harvard Business School, has said, “Small businesses still claim that loans are difficult to get during the recovery.”

Part of the problem is not that small business owners are asking for too much, but rather, too little. For a number of reasons (including regulation), it’s become too expensive for banks to underwrite and service loans under $250,000—making the $25,000 or $60,000 small business loan problematic. They’d much rather be working with $500,000 to $1 million loans or more.

The Federal Reserve Bank of New York recently reported that 70 percent of the business owners they surveyed were looking for loans under $250,000 and 39 percent were looking for $50,000 or less. That’s one of the reasons the SBA removed fees on loans under $150,000 a couple of years ago and why this year they expanded their partnership with credit unions to make smaller dollar loans.

Fortunately, those smaller loan amounts fit within the sweet spot of many online lenders. What’s more, many of these online lenders don’t require the same rigid credit criteria as traditional lenders (provided other data points indicate a healthy business), making capital more accessible to some borrowers who would be likely turned away at the local bank.

While I don’t think banks are going away any time soon (they still maintain the largest share of small business loans on the books in the U.S.), new technology and data allow online lenders to look at small business loans from a different perspective, enabling them to offer unique loan products designed to fit the specific financing needs of new and growing businesses. This will require business owners to become savvier regarding which loan products best fit the needs of their businesses.

With that in mind, convenience and access to capital are two reasons to expand your search beyond the local bank.