Innovations in online lending now make it possible to get a small business loan as quickly as possible. To put it into perspective, the application and approval time could be finished before you even pack up your things and head home for the day.
Once you complete the quick and simple application, approval happens almost instantaneously and funding is fast as well. If you’ve never applied for an online business loan, you may be wondering how that works. Here, we’ve outlined the process.
Moving the Entire Process Online
The convenience of applying for loans online has been around for a while, but when it comes to business loans, the online pickings have traditionally been slim. Even traditional lenders who let borrowers apply for car loans or credit cards online usually require entrepreneurs to come in and meet with a loan officer in person when it comes to a business loan.
Alternative lenders don’t follow this inconvenient model. Instead, they set up their loans so that prospective borrowers can complete the whole process online. There’s no faxing, scanning or driving to meet with a loan officer. Rather, alternative lenders are able to dispense with those tasks by developing new risk models.
Using New Risk Models
Traditionally when reviewing a business loan application, banks looked at a business’s credit report or at the credit reports of the business owners — that information takes years for credit reporting bureaus to compile, and it often reflects information that isn’t relevant to the current loan. To assess how the funds were going to be used, banks also looked at detailed business plans as well as a myriad of accounting reports. All of that took time to review, and in some cases, the loan process stretched on for months. In spite of that massive time commitment, borrowers were never assured of funding, and even today, most business loan applicants at major banks walk away empty handed.
Online lenders take a different approach to risk. These lenders look past credit reports and business plans — in fact, some lenders don’t even look at the former, and most lenders don’t look at the latter. Instead, alternative lenders assess risk by looking at how the business is actually performing in real time and analyzing customer excitement and engagement around the brand. They do this with a responsive online application that allows applicants to share a wide range of data points quickly.
Understanding Data Points for Online Loans
The data that online lenders take into account when assessing a loan varies depending on the lender, the industry and what information the borrower wants to share. Let’s say a borrower uses online accounting software, a business bank account and a payment processing service among other accounts. To show the lender a bit about his business revenue and cash flow, he shares that data with the lender. At the same time, he wants to underscore excitement about his product to show that he expects orders to go through the roof, so he also opts to share data about engagement on his business social media accounts.
To illustrate another example using another type of data, imagine a recent college graduate wants to take out a loan. Her credit score is low, but she has great grades, especially in business classes. There are online lenders that take this information into account.
This may seem like information overload, but sharing this information with an online lender takes mere seconds. Online lenders don’t require borrowers to manually enter information. Rather, borrowers can simply authorize their online apps and programs to share information. In most cases, this happens through a secure sign-in process where the borrower signs in on their primary service provider’s portal and that allows the lender to get a one-time peak at that information. Securely coded tokens ensure that the information is only viewed once by the lender so borrowers don’t have to worry about safety.
All of that happens almost instantaneously. At that point, the online lender brings in the underwriters. Because the risk profiles on these loans tend to be so accurate, underwriters are lining up to offer these loans. That boosts approval time and gets funding into entrepreneurs’ hands faster than ever before.
While many borrowers are turning to online business loans because of the speed and convenience, that’s not the only draw. Many borrowers are turning to online lender because of the variety of funding options for businesses. These companies provide a long needed alternative to traditional business loans, credits cards and family loans. They offer unsecured loans and lines of credit that are easier to obtain than traditional business loans, but beyond that, some lenders offer loans backed by floating assets such as inventory loans, microloans, startup financing and multiple other financial products.
While convenient online business loans are a relatively niche offering, these loans are likely to become the go-to-standard for business financing. In that vein, many traditional banks are pairing with fintech companies. These banks can’t compete with the accessibility and convenience of online lenders, so banks are having these companies design and create online lending portals so they can diversify their offerings. Eventually, applying for a loan in the time it takes you to commute home from work is likely to be the norm.