The phrase “you need to spend money in order to make money” exists for a reason. It illustrates a common struggle that many business owners grapple with. In short, you may have a unique operational model and your products or services could genuinely fill a crucial market gap. However, this becomes valueless without a necessary financial investment. The problem is even more complicated when lending institutions make it difficult for applicants to get a loan. This issue, in itself, is a major driving force behind the growing popularity of platforms that offer small business funding online.
When an entrepreneur goes to the bank and applies for a loan, they must show years’ worth of financial statements and demonstrate consistent revenues. Yet why would you apply for a loan if this was the case? That is to say: Entrepreneurs need money and capital in order to attain the said consistent earnings. This, of course, doesn’t even include filling out piles of paperwork, gathering an endless list of needed documents, and passing a credit check (which lowers your credit score, regardless of whether or not you get approved).
It is important to remember that small businesses are the backbone of the economy. They still play a crucial role, one that daunting bank requirements cannot diminish. Because of this, entrepreneurs are finding more success when they apply for loans from a non-traditional lenders. Additionally, new tools that provide small business funding online keep appearing every year. Some of them will directly let entrepreneurs borrow money, while some websites connect business owners with potential investors.
Why Searching for Small Business Funding Online Is Becoming Popular
During the last few decades, traditional commercial lenders gradually lost touch with small business owners. Firstly, their loan approval requirements are difficult to meet.
Equally as important, banks and financial institutions are shifting their focus towards larger corporations and away from small firms.
A Discouraging Traditional Process
Just over one-third (37%) of business owners applied for a loan. Out of those who didn’t do so, almost 30% found the funding requirements to be discouraging. To clarify, that’s almost one-fifth (18%) of all business owners.
Can we blame them? Not really, especially because 40% of small business loan applicants end up getting rejected.
There are many reasons behind this. New entities, for instance, struggle because many banks require them to operate for a certain number of years in order to qualify for a loan.
Similarly, most financial firms prefer to issue larger loans because they can generate more interest revenues.
Therefore, many small businesses are left in the dark. Not only is a bigger loan difficult to attain, but entrepreneurs may not even need a sizable amount, to begin with.
Above all else, the banking sector doesn’t seem to care about serving this market, or at least, that’s what the statistics are suggesting.
In 1995, for instance, banks issued more than half of their loans (51%) to small businesses. By 2012, these firms’ share in the lending market dropped to 29%.
While brick-and-mortar financial entities are shunning small businesses, entrepreneurs are also finding new ways to raise money. In fact, these methods are even more convenient and less costly than going through a bank.
During 2017, 24% of businesses applied for a loan from an online lender, and 75% of them got approved. Moreover, these digital platforms are willing to work with entrepreneurs based on what they need.
For example, the majority of small businesses requested less than $100,000 in funding. A large bank’s average commercial loan size, on the other hand, is $493,000. Smaller banking firms typically issue $146,000 per loan.
Nontraditional sources, including platforms that offer small business funding online, have an average loan amount of $80,000. Unlike banks, digital lenders tend to look beyond the potential interest revenue when they evaluate an entrepreneur’s application.
Just as important is the convenient and hassle-free process. Many websites will show applicants how much they could qualify for without conducting a “hard” credit check.
That is to say: Shopping for loans from financial institutions will dock your or your business’s credit score. Soft checks, meanwhile, allow you to compare different rates and amounts without impacting your credit.
Peer-To-Peer Investments and Loans
Entrepreneurs can attain small business funding online through websites that connect them with potential investors. To clarify, here is how it would work: Firstly, business owners would create a profile on a peer-to-peer platform, which may include their personal background, the company’s business plan, and any other information that an investor would care about.
After that, investors browse different entrepreneurs’ profiles and contact the one(s) that they want to work with.
Keep in mind that there are two types of peer-to-peer platforms. One allows you to raise money from investors who expect to generate a return or profit. The other focuses on helping you find individuals, rather than banking firms, who are willing to offer your business a loan.
Nonetheless, almost six percent of entrepreneurs secured small business funding online through these platforms in 2017. As times goes by, the popularity of the websites is continuing to rise.
From Kickstarts to Expansions
Entrepreneurs and business owners with different objectives can utilize digital platforms to raise money. Firstly, alternative lenders aren’t as strict as traditional banks, which is why an increasing number of businesses are relying on them.
Similarly, other websites allow you to connect with investors or other individuals who may provide your business with the necessary capital.
In short, reviewing your finances and putting together a loan application proposal is certainly worthwhile. If you are worried about visiting the bank, think again. You are much more likely to secure small business funding online.
Running a company is difficult, challenging, and stressful. However, it shouldn’t be a daunting process. After all, that’s a problem that loans and investments are supposed to fix, not create.