Every small business needs to start somewhere, and very few owners manage to begin and eventually scale operations without a loan. Unfortunately, this can be a complicated situation once you realize what borrowing from a bank entails. There's an entry barrier, because you'll need a great credit score, previous banking relations and secure income proof to qualify.
That's why so many business owners turn to alternative financing methods like obtaining business loans through online lenders. It's understandable, because these lenders focus more on the context of the loan, or why you need financing in the first place. But you have to be careful which products you apply for through online lenders, as it can have many unexpected effects on you both personally and professionally.
Business Credit Cards vs. Business Loans
You will find unsecured business loans typically are available at a lower interest rate than business credit cards. The installment-based financing is better for your credit rating, because your credit utilization rate only factors your revolving debt lines -- a category that your business credit card falls under.
Avoiding the credit card trap is crucial for keeping your personal credit score from crashing because of your business funding needs. A whopping 30 percent of your FICO score is calculated based on your utilization rate. This is the second-largest factor, so by getting a loan instead, you are limiting how your business financing impacts your personal credit.
Credit Bureaus Used by Online Lenders
There are two different types of credit bureaus that could come into play when working with an online lender: personal bureaus (Equifax, Experian, TransUnion) and business bureaus (Dun & Bradstreet, Equifax, Experian). The latter are much less common, as most lenders pull your personal file and factor it into your borrowing eligibility. But two of the personal bureaus offer business credit scores, and if you play your cards right, you can avoid impacting your personal credit.
Dun & Bradstreet is a bit different, as it operates solely as a business bureau, and utilizes a proprietary PAYDEX business credit score. You can qualify for many types of loans (such as working capital loans) with just balance sheets, cash flow reports and profit/loss statements, plus verification documents. The biggest helping factor is having at least two years of financial documentation, without any bad payment behavior in this time.
Typical Fees With Online Lenders for Business Loans
Your loan cost depends on the type of financing you require. Some examples include standard small business loans, merchant cash advances, business loan consolidation and hard money loans. If you have equity in an investment, you may wish to obtain a hard money loan to achieve lower interest rates. When borrowing this route, it is possible to avoid any upfront fees, making it a viable route when consolidating high-cost business loans.
Read up on "Avoiding Hidden Fees on a Small Business Loan" before applying for financing from online lenders catering to businesses. There are many surprise costs that can exist, but a quality lender will be fully transparent and won't find indirect ways to bill you more.
Getting your business up and running, or preparing it for S-curve growth results, is no easy task. The hard work you put in as a business owner is not enough; sometimes, the difference maker is your company's financial strength.
When a traditional bank loan will not work, your alternatives are many, but not all are great choices. You should aim to find a business capital provider that works alongside small business owners. Check our "Guide to Online Small Business Loans" if your business currently requires a non-traditional funding source.