How has getting a small business loan changed, and what are my non-bank options?

If you applied for a small business loan years ago, you probably remember everything that you had to do in order to be approved by a financial institution. Banks put many entrepreneurs through an exhaustive approval process for even the most straightforward of loans. The process probably started months before you actually filed your application, and it probably took a while for you to actually be approved for a loan.

Fortunately, the process has changed significantly in the last few years, especially in today’s digital economy.

You used to have to visit a few branches of different banks to be approved for a loan, but today, there are many more online options available.

The Growth of New Online-only Lenders

In 2008, the financial crisis forced many banks to tighten their lending standards. After that, small business loan approval rates fell sharply. What saved entrepreneurs then was the growth of new online-only lenders. Today, they offer many more choices than they used to and are far easier to apply to than banks.

One of the biggest changes in today’s economy is how long it takes to get financing. Traditional business loans are issued by banks that subject every application to extensive underwriting. That can mean months of waiting while decisions are made, time that could put your growth plans at risk. That’s where online lending comes in. These companies use technology and automation to cut down on paperwork and move much faster.

These days, people expect everything instantly. There’s no way to reprogram that thinking. Thankfully, many lenders are racing to meet that demand. In some cases, a few minutes on an application is all that it takes. Then, the cash can be yours in as little as two days. And that kind of speed brings welcome relief when the money’s tight.

Banks can also be strict with credit score requirements. For traditional bank loans, your score needs to be around the 680 mark or higher. Thankfully, the minimum acceptable credit score is lower with online lenders.

Some lenders check eligibility by asking you to link your online business accounts, such as your business checking account. This way, they can see your financial history and make a decision quickly.

Online lenders also weigh factors such as your business’ age and annual revenue, as well as overall cash flow. They do still check your credit score, however. If yours is below 600, you may want to hold off on applying for a loan until you improve your score.

Traditional bank loans require the same monthly payment over the term, whatever happens. But not every business brings in a consistent flow of cash. Some can have sales that fluctuate with the seasons. Now some online lenders offer more flexible repayment plans. That’s a huge help if you run a seasonal business or one that works on a nonstandard fiscal year.

A good example of a flexible repayment model is a merchant cash advance. These are repaid as a fixed percentage of your daily sales. So if you run a seasonal business, slow days during the off-season mean smaller repayments. The catch is that interest rates on these advances can be high, which may still be worth it if your business is seasonal.

Small Loan Amounts

Traditional banks usually take on larger business loans because it isn’t profitable for them to issue smaller ones. Online lenders are turning that math on its head though. They built their companies on technology that lowers their underwriting costs, so they can make money even on small loan amounts.

These small loans, called microloans, are issued to business owners who don’t need large sums but a more modest amount. What’s the average size? About $13,000, but these loans can range from as little as $500 to as much as $50,000.

Weigh Your Choices

You may need a small amount or more flexible terms or just the cash to speed up your plans. And so there are more options today for entrepreneurs than ever before.

Despite the growth of alternative financing, conventional bank loans still have the lowest interest rates. So, if you’re the owner of an established firm with excellent credit, a bank loan is still probably your best option. And if you don’t meet the criteria, you still have many alternatives now. Your goal is to weigh your choices and pick the one that makes sense for your company’s short and long-term success.

Whichever loan you choose, it’s a really good idea to keep your books in order. Most lenders will ask for the usual documents: your profit and loss statements, your balance sheets and last year’s tax returns. So get the right accountant or certified public accountant to handle all of this well ahead of time.