Online loans can be a great option for small businesses looking to grow, but do cost more than traditional bank loans. Here are the main reasons why.
Banks Get Money From Customers and the Government
Banks get money from two sources: customer deposits and the Bank of Canada. Banks are able to give low rates because these are cheap sources of funding. For example, banks use the money in your savings account to lend to small businesses, but only pay you 0.5 – 2% in interest a year.
Meanwhile, online lenders typically get their money from their founders and investors such as hedge funds and venture capital firms. Due to these differences, online business loans cost more for borrowers because they cost more for alternative lenders too.
Online Lenders Take On Higher Risk
Banks are known for requiring a high credit score, strong financial performance over many years, and collateral. Meanwhile, online lenders will accept lower credit scores, don’t require specific collateral, and take more into account when evaluating the business’ financial position such as cash flow and accounts receivable. As a result, online lenders have to charge higher rates to make up for the additional risk.
Online Lenders Process Applications Faster
A bank loan application requires hours of paperwork and they take several weeks to be approved. In comparison, online lenders have applications that can be completed in minutes and approved within a few days. However, this quick processing time increases the cost for both the online lender and the borrower.
Online Loans are Much More Convenient
Online lenders allow you to apply and receive your funding a lot more conveniently than banks can. For example, an online application can easily be done from the comfort of your computer. Meanwhile very few banks can provide that level of convenience.
Although online business lenders charge more than banks, their speed, convenience and willingness to lend to higher-risk clients make them a good solution for many. If you’re looking to learn more about this space, here’s our guide on alternative lending in Canada and the solutions available for small business owners.