As a small business owner in the industry for a small business loan, you might have more than once come across terms like alternative lenders, marketplace lenders, and online lenders. These are terms that are all used to describe the new classification of non-bank and unregulated lenders that have recently emerged with the primary purpose of providing financing to small businesses that banks and other lenders might consider too risky.
In actuality, resorting to online business lenders comes with its cons and pros. However, this is a futuristic wave, but it is also the wave happening today, especially to small businesses looking for loans. This should obviously be a prominent choice for small business owners seeking finances for their businesses. More often, online lenders [rovide these three main products to small businesses; accounts receivable, term loans, and lines of credit.
What is Online lending marketplace?
Online marketplace lending, sometimes known as peer-to-peer or platform lending, is a comparatively new type of online lending. It uses online platforms to connect businesses or consumers who seek to borrow money with investors willing to invest in the loan. In most situations, after a loan is made, the platform collects principal and interest payments from borrowers and sends the payments, less specific fees that the platform keeps, to investors. Generally, marketplace lending platforms market both new loans and loans that can be used to refund existing debt.
Benefits of an online lending marketplace
Here are some benefits for considering online lenders, and disadvantages that you might deal with.
Reduced time and convenient
There is arguably no other method to save time when it comes to looking for business loans than going online. Contrary to a hard application for traditional loans, applying for online loans is simple. Simply open an online loan page, where you can compare the deal they give you to the offers from other lenders. If you are content with an offer, you will fill in the information needed and wait for their response, which in most situations, can take as little as a day to get the funding you need.
Considering that the internet makes just about every part of our lives simpler, you can apply for an online loan as well. Whether you decide to apply online while traveling, out for lunch, or while watching a movie, you can do it when the time is convenient for you. That is based on the fact that the internet is open throughout, and so are the online loan application websites.
Only one lender checks your credit score
With online lending, small business owners do not have to worry about many lenders having to access their credit reports off and on. Whereas too many requests for your credit report can harm your credit score, applying for a line of credit or an online loan ensures that this negative effect is discarded since you only have one source checking your credit report and information.
Online Lending marketplace loans can meet short-term liquidity needs
Established small businesses more often have existing banking relationships and approach online lending marketplace when their credit histories are deemed too weak for banks to lend to, or when they have immediate liquidity needs, and bank application and approval processes are not quick enough to address their immediate needs. Generally, established small businesses have a higher demand for lines of credit (LOCs) than micro-enterprises- a loan product that is mainly designed to meet short term liquidity needs.
Flexible return options
Since being online abolishes a host of expenses, such platforms tend to provide lower interest rates and higher returns to borrowers and lenders. Compared to traditional methods where interest rates are so high, and excessive value of the collateral is demanded, online lending marketplaces typically provide unsecured loans to borrowers with flexible return options.
Compare several options at once
Online lending websites are beneficial because they allow you to compare several loan offers all at once on the internet. This is vital and makes it simpler to compare and get the best terms and interest rates possible. Again remember that online lending can be an ideal option if you are not eligible for a bank loan, and you need funds immediately.
Minimal documentation required
You will not need to devise a great plan of how you will be spending the money, nor will you have to provide most of the information that traditional banks need. Simply say goodbye to endless paperwork and welcome simple online applications like those offered by Become.
Become will take your request and qualifications into account and match you with one of its more than thirty-five lending partners to get you the best offer that you can qualify. If you are rejected for the business loan, the transparent process will inform you why, where you went wrong, and to better your application to get the funding you deserve.
The lender does not identify you personally
Investors will see your loan request; however, you will not be personally identified. All that is done online and online lending marketplace loans can be used for just anything, substituting for second home equity lines, mortgages, or traditional bank loans.
Best for small business and those with an average score
Lending platforms such as Kabbage, Lending Club, and Prosper have become a great source of quick money for small businesses and individuals, even with an average or low credit score. These platforms provide an easy application process, automated credit checks, and faster approvals ensuring quicker turnaround time at each stage. For borrowers and lenders, online lending marketplaces could be a great alternative when compared to traditional methods. Nonetheless, digital lending is still a new frontier to many, with challenges yet to be covered.
Cons of online lending marketplace
Some of the disadvantages that business owners have to deal with when it comes to online loans include:
Higher interest rates
Even though small borrowers can secure funds from the online lending marketplace, they are often unhappy about the high borrowing rates. The United States Treasury survey showed that marketplace borrowers had the lowest lender satisfaction rankings amongst Marketplace lenders, small and large banks, and credit unions. Most of the dissatisfied borrowers, roughly seventy-percent, cited the online lending marketplace’s high-interest rates as the reason for dissatisfaction- compared to 15-percent and 18-percent at small and large banks, respectively.
As a sample, OnDeck reported in its 10-k filing with the SEC that its weighted average APR for lines of credit and term loans was roughly forty-one percent in Q4 2015. The high lending rates at small business online lending marketplace reflect the high credit risk; nonetheless, marketing customer acquisition expenses, high sales, and high costs of funding are some of the non-credit reasons why lending rates at the online lending marketplace are high.
The online lender may go out of business
Considering that online lending plans for businesses are still in developmental phases, there are chances that your online lender can go out of business for one reason or another. One general example is NetBank, which recently went under, thus causing significant hassles for their clients. Someone might argue that even a normal bank can go out of business; however, there is statistically less of a chance of that occurring. It is thus advisable that if you apply for an online loan, ensure that you go with a highly established and popular lending institution.
Reduced human to human interaction
By getting rid of the human factor through much of the lending process, digital platforms enhance customer experience through accessibility, speed, and accuracy. However, the lack of human interaction in the process can hinder the customer experience in many ways. When it comes to outlining the specific circumstances of a small business or getting solutions to problems that the automated system has not yet perfected or encountered, human interaction can be an invaluable asset. Online lending platforms are still working to strike that balance between human touch and automation.
The ease with which business owners can now get a loan can also be seen as a disadvantage in the long run. Since automation plays such a vital part in online lending platforms, most customers who will be approved for a loan will ultimately have a tough time paying it back. This ties back to how advanced algorithms learn and adjust themselves over time but can, sadly, make mistakes in the short term.
All in all, online lending marketplace loans are reliable and convenient for small business owners, especially when there is a pressing need to add more money into the business. Try researching this kind of funding program as an option in your quest to build your business empire.