Before exploring the topic of traditional banks versus online lenders as a source of startup funding, it’s interesting to learn where typical startups get their funding today. While no two startups are exactly the same, founders might gain valuable insight by learning how other new companies have raised the capital to manage daily operations and grow their businesses through a funding source. The lesson provided by other companies may lend tips for success or even cautions about potential hazards.
Where does startup financing come from?
According to SCORE, almost three out of four small companies obtained financing in the past year. Below is a breakdown of some sources of this financing:
- Personal assets or credit, such as home equity and personal credit cards: 57 percent
- Bank loans: 8 percent
- Business credit cards: 2 percent
Startup founders probably are not that surprised to learn that other founders don’t turn to traditional financing sources in great numbers. According to The Wall Street Journal, traditional banks have reduced the number of small business loans during the past decade.
The 10 largest banks offered $44.7 billion in small business financing during 2014, a reduction of 38 percent since they lent $72.5 billion during 2006.
It’s common knowledge that many startup founders risk their personal assets and credit when they begin new companies. At the same time, risking personal assets or credit seems to negate a lot of advantages of setting up a corporation in the first place. Unless the founder has huge assets or personal credit in reserve, this practice also risks running out of money during a crucial stage of business growth. Used wisely, startup owners can use business loans to help manage their company’s cash flow.
Why don’t startups turn to banks in great numbers?
The article attributed this decline partially to tight credit standards and the fact that banks don’t find it makes economic sense to make many risky loans these days. To be fair, banks have also seen a decline in demand for their loans from the small business community. Typical applications for bank loans can take a long time to get approved and may require substantial documentation that takes time to prepare. Busy startup founders may decide that they just don’t have the time or resources to invest in seeking a loan that they may or may not get approved for.
Why turn to online lenders?
Why are startup owners and managers seeking startup loans from online lenders? The main benefit of online lending platforms may simply be their accessibility and convenience. Every bit of business can be handled from a computer with an internet connection.
Compare the process of obtaining funds from an online lender to that of a traditional bank:
- Business owners simply have to complete an online application and not visit a local bank
- In many cases, the owner can receive instant approval for his or her loan application
- Typical loans can fund within a few hours to a few days
- Good online lending platforms have very transparent fee schedules and terms for making payments
In addition, business owners usually open lines of credit with online lenders. A business may get approved for $50,000, but if the company only needs $12,000, that’s all they need to take out and pay fees for. However, once the business has been approved, the owner has the option to access more of his or her credit limit later without having to go through the application process again. Generally, borrowers may obtain from $2,000 to $100,000 in funding from one of these internet lending platforms. Obviously, startup founders like this convenience and flexibility.
Online lenders might say yes when banks say no
Besides the ease of applying for an online loan, business owners may also find they can get approved before they have had to establish high credit scores for their company. Online lenders use financial technology, usually called Fintech, to draw upon many sources of information about a startup. These sources of information could include payment processors, online retail sites and even social networking websites.
This gives startups an alternative way to prove their credit worthiness even if their company credit scores are modest or don’t even exist at all. In any case, since all processing gets handled electronically, the business owner doesn’t have to go to a lot of trouble to find out if their business can qualify for funding.
Is online lending always better for startups?
Savvy business owners might take the time to shop around for the most sensible source of financing. Some founders may find that they can obtain financing at local banks with low interest rates and a reasonable approval process. At the same time, obtaining quick financing can be critical to managing cash flow and taking advantage of growth opportunities. Startup founders should know that they may find that rapid financing at an online lending platform.