4 Questions to Ask Yourself When Searching for Online Business Loans
As a business owner, securing the right type of financing aligned with the unique demands of your business is critical in order to grow and sustain your business. However, traditional banks may not always be the best funding option. Stringent lending criteria, including credit score requirements and extensive documentation, as well as lengthy approval processes and overall risk aversion, make it difficult to access capital from banking institutions. So when it comes to speed and flexibility, you might find yourself exploring online business loans.
According to a recent Small Business Credit Survey (SBCS), when faced with a financial challenge, 46% of the 11,000+ businesses surveyed turn to online resources for valuable information and guidance. With the increasing availability of online business loans, it can be overwhelming and confusing to decide which one is the best for your business.
In this blog post, we’ll walk through four areas to consider when researching online business loans. Keeping these concepts at the forefront throughout your journey to obtain financing will equip you with the knowledge and confidence to make the best financial decision for the future of your business.
1. What type of institution is the right partner for my business?
From a high-level, when looking for online business loans, you will come across two types of non-bank institutions – direct lenders and brokers. As the name suggests, a direct lender is a financial institution that provides loans directly to borrowers, while a broker acts as an intermediary between the borrower and multiple direct lending institutions. A quick Google search for “business loan options” will yield a long list of results for both direct lenders and brokers, but it can be difficult to identify the type of organization purely based on the content landing page. It starts with knowing what you value, followed by knowing what questions to ask upon engaging an initial point of contact.
Let’s take a deeper dive on some of the advantages each option has to offer.
The Advantages of Working with Direct Lenders
Funding Speed: When working with a direct lender, you will have an expedited lending experience with no intermediaries involved. You can expect to receive funding in a matter of hours or days instead of waiting for brokers to conduct back-and-forth with other direct lenders.
Funding Flexibility: With complete control over the loan process, direct lenders have more flexibility in customizing terms to suit your specific business needs. Lack of control can result in delays, confusion and other miscommunications.
Loan Pricing: Brokers charge an origination fee which increases your total cost of capital. By eliminating brokerage fees, you can gain access to more affordable capital and utilize the additional cash for business growth initiatives.
Customer Service: Direct lenders are in the business of providing capital, and therefore, are focused entirely on your loan and its success. Although you may work with the same broker more than once, the broker business model is transactional in nature.
Borrower Privacy: In order to shop your funding options, brokers must share your financial information with various potential funding sources. This leads to widespread information sharing, as well as unwanted spam messages from unfamiliar lending institutions.
The Advantages of Working with Brokers
Funding Requirements: Working with a broker tends to have less strict funding requirements when it comes to credit score, time in business and revenue. With access to a wide variety of funding source options, brokers are able to match you with a direct lender based on the unique credit profile of your business.
Product Variety: With access to multiple direct lenders, brokers can find a funding source that offers a wide variety of products, such as term loans, factoring, equipment financing, lines of credit or SBA loans. However, it’s important to be mindful not to become a victim of forced product placement when working with a broker.
Time Savings: Brokers can save business owners time and effort by handling all of the research, application submissions and negotiations with lenders, allowing business owners to focus on their core operations.
Ultimately, it’s going to boil down to which of the above advantages are your top priorities. If you value pricing, service and privacy, it would make more sense to purse a relationship with a direct lender. Whereas, if your time is the most important thing or you like having options, you should probably work with a broker.
2. What are the differences between a term loan and an MCA?
A major factor to consider when searching for business loans online is the type of loan that best suits your business. Let’s review two very common options you might run into when doing your research – term loans versus Merchant Cash Advances (MCAs).
A term loan is a traditional form of business financing where a lump sum is provided to the borrower. Debt is repaid plus interest over a set period in regular installments. On the other hand, an MCA, which is technically not a loan, is a type of financing where a business receives a lump sum payment in exchange for a percentage of its future revenue.
When presented with both options, the two products may look very similar. While they both serve as viable working capital solutions, it’s extremely important to know the differences.
Funding Requirements
Term Loans: Generally speaking, lenders will review credit score, time in business and average monthly revenue, among other factors, to determine eligibility.
MCAs: Much more lenient in terms of eligibility since funding is based on your future sales as opposed to overall creditworthiness.
Loan Amount Ranges
Term Loans: Typically, loan amounts will range anywhere from $25,000 to $1,000,000.
MCAs: Typically, lower funding limits than term loans. Institutions will usually consider funding up to 250% of your expected monthly sales volume.
Repayment Types
Term Loans: Fixed amount based on the term of your loan. Payments can be made on either a weekly, bi-weekly or monthly basis, generally speaking.
MCAs: Fluctuating repayment amounts. Determined by a percentage of your daily bank deposits, resulting in unpredictable expenses.
Repayment Period Ranges
Term Loans: Repayment terms ranging anywhere from 6-24 months.
MCAs: Usually ranges anywhere from 3-12 months, but it will be dependent on your sales volume. These shorter repayment periods can strain the cash flow of your business.
Annual Percentage Rate Ranges
Term Loans: APR can range from 15% up to 35%.
MCAs: The equivalent APR can range from around 40% to over 100%.
As you can see, the two options are vastly different. In general, if you qualify for a term loan and appreciate consistency with repayments, then it would be wise to go the term loan route.
3. What is the underlying issue that needs to be solved?
Arguably, the most crucial of the four questions, involves an understanding of the fundamental reasons behind your cash flow needs. This understanding is advantageous in multiple ways as it helps you identify specific solutions to overcome your challenges and provides a broader view of your financial obstacles.
For example, consistent cash needs due to delayed receivables (i.e., net 30, 60 or 90) might tempt you to apply for an MCA as quick stopgap. However, this solution only addresses the immediate problem and does not supply a lasting remedy. As your business expands and takes on larger contracts, it’s probable that the slow receivables issue could reoccur. In such scenarios, Accounts Receivable (AR) Invoice Factoring could be a more sustainable method to bolster cash flow and foster growth. It’s essential to thoroughly consider the long-term impacts of a financing choice and opt for one that is aligned with the goals and requirements of your business.
If your business faces an outlier challenge, such as being awarded a new contract that requires an additional investment in overhead costs, leading to hiccups in payroll, an MCA might seem like the right solution. But this choice could lead to high interest rates and other costs in the long run. A better alternative could be a bridge loan, which offers immediate funds with a clear repayment plan. You’re able to solve your immediate need and pay off the bridge loan in 30 days.
Although it can be hard to differentiate isolated versus recurring cash flow needs, it’s going to be in your best interest to get things right the first time around and set your business up for long-term success. This type of foresighted thinking will enable you to concentrate more on business expansion while sparing you from having to revisit similar financing challenges down the road.
4. Who would be my customer service point-of-contact?
To delve further into the effects on client service when loan situations face challenges, let’s first revisit our discussion on direct lenders versus brokers. Direct lenders primarily exist to offer capital to borrowers. They value exceptional client service, providing a dedicated team of specialists to address any questions or issues during the loan servicing process. Conversely, brokers operate transactionally, concentrating on aligning loans with direct lending institutions. In situations requiring superior customer support, brokers may not be your optimal contact point.
Now let’s revisit the distinctions between term loans and MCAs. In the matter of term loans versus MCAs, the former’s fixed payment structure means lenders are often open to adjusting payment timelines to prevent borrowers from defaulting. On the other hand, given that MCAs rely solely on future sales, the MCA institution could potentially assume future payments if you’re finding loan repayments challenging.
It's essential to understand that your choices of partners and loan types can significantly influence your overall satisfaction and experience, particularly if high-quality customer service is a priority for you. It’s important to investigate customer service policies and examine previous clients’ reviews before making your final decision.
In Closing
In summary, when searching for online business loans, your direct point-of-contact and product type hinges on what you prioritize most for the health of your business. Price sensitivity and personalized service may sway you towards a direct lender, while valuing time and the desire for a breadth of options could lead you to partner with a broker. When considering consistency in repayments, a term loan could be the preferable option over an MCA. In addition, pursuing loan options that support sustainable growth sets a strong foundation, even though alternative options may seem more convenient at the time.
If you’re looking for an online business loan that meets your unique requirements, remember that making an informed choice today can set the stage for your success tomorrow. Email us at sales@breakoutfinance.com to explore the optimal loan solutions we can offer for your business.
