Over the last few years, business lending and borrowing have changed drastically, and many analysts cite low approval rates on traditional bank loans as well as the increased market aversion to risk as two of the biggest contributors to change. Perhaps the most dramatic recent change is the growing shift toward online lending.
If current trends are any indication, online lending is here to stay, and as a business owner in the contemporary world, you need to know how to optimize your business through online lending.
Here’s a look at some of the most important optimization strategies.
1. Creating a rainy day fund.
Regardless of your level of business acumen, the quality of your product or the health of your industry, you are likely to stumble into times when you don’t have the cash you need for your business. In some cases, you may not have the operating capital you need because your production side is growing faster than your revenues. In other cases, your clients may not be paying their invoices quickly enough or you may need an emergency repair to a piece of equipment. In spite of the specifics, the answer is always the same — you need more money. Unless you have the luxury of a well-padded savings account, you should have a line of credit set aside as a safety net or rainy day fund.
2. Jumping on investments.
A savings account or a line of credit can be critical when you’re mired financially, but to optimize your business’s relationship with debt, you should also be ready and willing to use online lending to jump on investment opportunities.
When sizing up the value of an investment, compare the potential return on investment with the interest rate of the loan. If the former beats the latter, it’s a no-brainer. Unfortunately, however, nearly a fifth of small business owners aren’t able to pursue investments because they cannot get the funding they need. Don’t become one of these people. Instead, get familiar with lenders who are willing to help.
3. Optimizing new credit models.
When you turn to an online lender, the criteria used to assess your creditworthiness is likely to be different than the criteria considered by traditional banks. Rather than judging business owners based on outdated models, online lenders leverage the power of data. These lenders look at your business’s sales information, payment transactions, accounting records, client testimonials, social network connections and multiple other types of information, and using that information, they create a trustworthy picture of your business that allows them to accurately assess your likelihood of repaying the loan. By turning to an online lender, you allow your business to be judged based on its success, not on the success or failures on your personal credit report.
4. Finding the best rates.
Because online lenders are using technology in innovative ways, they are lowering risk. That ultimately translates to a greater number of underwriters willing to extend credit at competitive rates. In many cases, this results in online loans boasting lower rates than small business credit cards.
As a business owner, it’s important to optimize your credit opportunities by always shopping around for the lowest rates and the best terms, even if that means trying a new form of credit. In addition to comparing rates and terms, also consider any loan origination or application fees. Legitimate lenders only include fees in the repayment plan — they do not charge you to apply for the loan.
5. Ensuring safety.
In order to access your data, online lenders generally request that you share information through the websites and apps that you use. This can include anything from QuickBooks to PayPal, to Amazon, to eBay, to multiple other sites and services. However, before you share this information, make sure that the online lender is committed to safety. Their site should be encrypted and have a valid security certificate, and they should have security measures in place to ensure the information shared via other sites is transmitted safely and securely.
6. Insisting on fast approval.
One of the benefits of online lending is its fast approval times. Because alternative lenders base their decisions on data, you generally don’t need to worry about creating lengthy business plans, complicated financial statements or other supporting information. Instead, you simply need to find a lender who has the power to access and review data quickly so they can fund your loan quickly. There’s no longer any compelling reason to wait for small business funding.
7. Taking advantage of other services.
Online lenders don’t just provide capital to small businesses. Many online lenders also support the growth and development of their clients by offering educational blogs or access to mentorship programs. If you are working with an online lender, take advantage of these opportunities and utilize them to help your business grow.
8. Keeping finances separate.
If you are just getting started, it can be challenging to keep your personal and business finances separate. However, a line of credit from an online lender can help. Simply, use that line for all your business expenses, and you instantly have an accurate record of all the costs your business has incurred for the year.
With the combination of fast approval times and new creditworthiness models, online lenders are permanently altering the relationship between small businesses and credit. Most importantly, they are changing who has access to business loans. As a small business owner, you need to know how to obtain, leverage and optimize this relatively novel form of lending.
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