In the last twelve months, online business loan options are popping up everywhere, choosing the right one for your business can be harder than you think.
What’s an online business loan and why is it any different to a regular loan?
The reality is online business loans are not that much different in operation from regular lenders however, when it comes to efficiency, speed and reduced administration involved in obtaining loans, these new alternatives can take the stress out of getting a loan without spending endless time completing lengthy paper applications and waiting weeks for credit decisions.
To be classified as a true online lender, your application and pre-approval process must be entirely online without any paperwork or completing a form and “getting a callback”. You can spot the lenders that are masquerading as online lenders very easily if it requires a call or contact with the lender before you’re offered a pre-approval for funding.
Online lenders that fit into this category must allow you to “self-serve” your own accounts, meaning that all loan request or repayments can be done on your own. They all offer very good customer service and it should be understood that online lenders offer a very high level of service, however for customers that like to take care of themselves the technology is there to give you this freedom.
Presently there are only two types of loans available online and these can be classified as follows:
Fixed Term Business Loans
A fixed term loan has a start and end date for the repayment of the loan in full. You are required to pay a fixed amount each day, week or month depending on the lenders structure.
An amortizing business loan is a loan where the principal of the loan is paid down over the life of the loan (that is, amortized) according to an amortization schedule through equal fixed payments or principal and interest. The lender calculated a schedule based on the reduced principal each month or week and adjusts the interest payable based on the principal that is outstanding at each stage.
Amortizing loans are typically structured like a mortgage however, they are currently only offered over a maximum period of 6 months which could potentially add some stress on cash flow to meet these short term obligations. These types of loans are preferable within the “fixed term loan” options as they are more cost effective.
Merchant cash or Direct Debit “Factor Rate” loans
Fixed term lenders that don’t represent rates as “interest repayments” use a relatively new term called a “factor rate”. A factor rate is calculated by taking the amount borrowed and adding a factor rate usually between 1.3 – 1.6. If you borrow $100,000 and the factor rate is 1.3 you will repay $130,000 over the period usually being 3,6 or 9 months. You will usually repay these loans in set equal amounts from the first payment until the last and the cost of the interest remains the same on the original principal amount you borrowed until it’s repaid in full.
The two examples listed above both require repayments by automatically direct debiting fixed repayments from your bank account however, it’s the mechanics of how interest is calculated that is the key differentiating factor.
Revolving Lines of Credit
A revolving line of credit provides you with a maximum credit limit of capital you can borrow. Unlike a fixed term loan, the revolving loan allows you to draw down, repay and re-draw on the facility up to the available funds over no specific set period and does not have any fixed number of payments.
Real estate backed credit line
This is how it sounds; the lender will provide a revolving credit line against the equity in real estate assets you offer to the lender. The line of credit will be never be allowed to increase over the equity in your property and in some circumstances can hinder some businesses that have ever increasing sales.
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Receivables backed credit line
Not to be mistaken with invoice factoring or debtor finance. A receivables-backed line of credit is sometimes referred to an asset based line of credit that operates by extending a maximum floating credit limit that can be drawn down against and repaid based on the value of your outstanding receivables balance at any given time. The advantages of this type of facility are that it’s not tied to the value of real-estate assets and will grow in line with sales of the business. This type of facility operates like an overdraft.
The two examples listed above both only charge interest on the balance outstanding and do not require any fixed repayments and usually have no set term of the loan.