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When not working as the editor for OnDeck, Ty Kiisel is a speaker, podcaster and regular contributor to Forbes.com and DeseretNews.com. With more than 30 years experience, Ty shares small business tips, advice and best practices by incorporating his wealth of knowledge gained through personal experience. We were lucky enough to get the chance to ask him about online business loans and how OnDeck can help small businesses get funding for growing their bottom line.
What is the difference between an online business loan and a traditional bank loan?
There are a number of differences between an online business loan and a loan at the bank.
Online lenders, like OnDeck, offer a simple and quick application process that only takes a few minutes to complete compared to the multi-page application documents required by many traditional lenders like banks or the SBA. Online lenders can often provide an answer to a loan application within an hour or two vs. the weeks it could take a bank to get an answer.
At OnDeck, for example, we leverage much more data to make creditworthiness decisions than the bank traditionally does. A business owner’s personal credit score figures into the equation, but it’s only one data point. We evaluate many other metrics that demonstrate a strong and healthy business. At the bank, the personal credit score of the business borrower is often a go-no-go metric if they fall below a certain threshold. Typically that is a score of 680; 650 for an SBA guaranteed loan. Online lenders will work with business owners with a lower score if the business looks healthy and can demonstrate the ability to make the periodic payments.
In short, online lenders are taking a different approach to how business creditworthiness is evaluated, streamlining the application process, and how quickly funds are delivered to a business—24-48 hours after loan approval as opposed to what sometimes becomes an additional weeks-long waiting period at the bank.
How does the OnDeck service work?
The business completes a simple online application that only takes a few minutes to finish. Their application is reviewed, they will meet with a loan advisor who will discuss their application with them and request a few documents from them, and in most cases, they will know whether or not their application is approved within an hour or so of this evaluation.
If the application is approved, the funds are often deposited in their business bank account within 24-48 hours (one to two business days). Periodic payments are made via ACH withdrawal on either a daily or weekly basis depending upon the particular loan and term.
What are the advantages and disadvantages of an online loan?
The primary advantage of an online loan is the ability to act quickly to take advantage of opportunities to capture additional profits or other high ROI opportunities. When capital is needed to take advantage of a growth opportunity, weeks- or months-long wait for loan approval and delivery of funds is often too long and opportunity costs are too high. The ability to access funds in a day or two is a very compelling advantage.
Another advantage is the application process itself. Online lenders don’t expect the average small business owner to be a financing expert, so we’ve tried to make the application process as simple and straightforward as possible—while still thoroughly evaluating the creditworthiness of every potential borrower.
Quick access to funds can come at a premium cost and the way loan costs are expressed can sometimes be confusing because different lenders will sometimes use different metrics. As a result, OnDeck, in partnership with other lenders as well as a non-profit advocacy group, introduced the SMART Box set of metrics as an additional disclosure on loan documents to make it easier for a small business owner to compare rates and fees. I’d recommend that borrowers ask about these metrics upfront, to make sure they understand the costs associated with the funds they are borrowing (you can learn more about the metrics in the link above).
The options available to small business owners today require them to be savvier about lenders they work with. Some loans (and lenders) are better than others, so it’s important to look more closely at potential lenders and the nature of the loans they offer. Make sure and look at their online reviews via services like Trust Pilot, the Better Business Bureau, and others. It’s important to make sure you are working with the right lender and they are providing you with the right loan for your business.
Who is your ideal customer?
For OnDeck the ideal customer is a healthy business that can demonstrate the ability to make periodic loan payments. As a minimum requirement, we like to see at least a year in business and annual revenues of at least $100,000 USD.
What documents do you need to apply?
The borrower will need to start with a business license, tax ID, revenue statements, and 3-4 months of bank statements. This can vary from lender to lender and the loan advisor may ask for additional documents, but if you’re prepared with information that demonstrates a healthy business, the borrower will likely have what they need.
What are some application process pitfalls to avoid?
Don’t try to borrow more than you need. There are costs associated with borrowing regardless of the lender you choose and borrowing more than you really need could hurt the profitability of your business. Make sure you have the regular cash flow you’ll need to make each and every periodic payment on time and avoid the temptation to stack multiple loans on top of each other because the loan costs can become burdensome and hurt your business.
What else do people need to know?
Treat borrowing the same way you would any other tool to increase the profitability of your business. Consider the costs of the financing, if possible estimate a potential ROI for the borrowed funds. Although there are a lot of reasons small businesses borrow, increasing profits or the value of your business are two good reasons to consider borrowing.
Why should someone consider an online business loan?
There are several reasons to consider an online business loan:
- Sometimes a healthy business might not have success (or the luxury of time to wait) at a traditional bank. Because online lenders take a different approach, many businesses that might not find success at the bank can find success with an online lender. This is the reason many small business owners now apply with an online lender, like OnDeck, without even considering the bank.
- The application process is simple and funds are available quickly.
- Online doesn’t necessarily have to mean impersonal. For example, many of our customers praise the personal service they received working with our loan advisors and cite that as a primary reason for choosing our company.
When is a good time for a business to apply for a loan?
If a business has an opportunity to increase profits, but needs some extra capital to act on it, that’s a great time to leverage borrowed funds. There are, of course, other reasons to borrow, but I like the idea of leveraging borrowed funds to take advantage of opportunities to grow and increase ROI.
Here’s a quick 5-minute video where Mr. Kiisel explains a little more about working capital.
Any additional tips for small business financing?
- Make sure you can articulate what you are borrowing for (your loan purpose). Understanding your loan purpose will help you determine the loan amount that makes the most sense, what loan costs might be reasonable, and the loan term—six months, a year, or longer.
- Become acquainted with your personal and business credit profile. We tend to impact the metrics we pay the most attention to, so regularly review of your credit profiles tends to impact what a potential lender will see positively. It will also help you identify where the odds of approval will be in your favor.
- Make sure you understand the costs of borrowing before you sign on the dotted line. APR is not the only way to evaluate a loan. A four-year term loan with a low APR can actually have a higher dollar cost than a higher APR with a shorter term. Make sure you match the right type of financing with your loan purpose.
Thanks Ty for your advice and insights to help us demystify the world of online lending.
Got more questions? Do you have experience with online loans you’d like to share?
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