Funding a Small Business: How to Choose an Online Lender and Get Financing For Your Business

How to Choose an Online Lender for Small Businesses


Business owners have a range of small-business financing options, and among them, online business loans are a quick and relatively easy way to get funds. However, there are often risks, too, including very high interest rates and unrealistic repayment schedules.

In this article, you’ll learn about online business loans for small businesses and how to choose an online lender.

What is online lending?

Unlike traditional loans that involve meeting with a banker or other representative, online borrowing uses technology to drive lending. Decisions are quicker and there are usually more approvals, but because online lenders take on more risk, these loans often come with much higher interest rates and fees and shorter repayment terms.

Online loans for small businesses grew out of the 2008 financial crisis when banks cut back on small-business lending. Today, online lending makes up more than 20 percent of all small-business loan applications according to a 2015 small business credit survey prepared by Joint Federal Reserve Banks.

Who provides online loans?

Online loans are often made by “alternative” organizations such as responsible non-profits, like Excelsior Growth Fund (EGF), which are called community development financial institutions (CDFIs), and riskier groups such as peer-to-peer lenders, merchant-cash providers or marketplace lenders.

Why use online business loans?

Business owners use online lending if they don’t qualify for traditional bank loans, or they want the speed and ease of the online process: A typical online application can be completed in 30 minutes, approval rates are higher and funds can be received in as little as 3-5 days.

What are the risks?

The primary drawback of online borrowing is the high cost, measured by annual percentage rate (APR). The APR on merchant-cash advances usually starts at 50 percent and can go above 100 percent, and APRs for online term loans start at 15 percent and can go much higher. Often, too, they require weekly or even daily loan repayment. These terms can crush many small businesses.

How to choose an online lender:


1. Identify your need.

Before you do anything, know what you need. Is it short-term funding for inventory or to cover bills? If so, a loan with terms of 12-24 months may help with temporary cash shortfalls, although high interest rates and short repayment terms could be more harmful than helpful. If you need funding to purchase longer-term assets such as equipment, a loan with a term of three or more years is better, although most online lenders only offer terms of two years or less.

2. Screen online lenders.

Predatory practices are common with online lending. Look for lenders or brokers who offer loan terms up front, have a physical address, and display website security disclosures on web pages. (For more information, see EGF’s article on predatory lending and the Borrower’s Bill of Rights.)

3. Conduct a true-cost comparison.

The only reliable way to compare loans is to compare APRs – which includes the total amount you’ll pay back with interest rates and fees – and repayment terms:

  • Merchant cash advances have the highest APRs and repayment is generally daily or weekly
  • Online term loans have higher APRs than traditional bank financing (but significantly lower rates than merchant cash advances) and repayment terms may vary from weekly to monthly

 Another important feature is the ability to prepay without penalty. 

4. Know what lenders focus on. 

For competitively priced loans with lower rates and better terms, lenders emphasize debt service coverage ratio (DSCR) – a measure of the likelihood that your business’s cash flow will cover its debt (see this EGF article for more detail). A strong personal credit score may make you attractive for a small-business loan, too, and consider whether your business has inventory or property that can be used as collateral (be careful about what you offer, though).

5. Ask about additional services.

Choose an online lender that offers additional services, such as free technical advice and help with longer-term financing and growth plans.  

Find a responsible online lending partner

If you’re considering an online loan, explore options available through responsible community lenders, such as CDFIs, first. Excelsior Growth Fund’s SmartLoan™ offers loans of $10,000 to $100,000 with affordable monthly payments. EGF is a signer on the Borrower’s Bill of Rights and is endorsed by the New York Banking Association and Independent Bankers Association of New York State. 


About Excelsior Growth Fund

Excelsior Growth Fund (EGF) helps businesses in New Jersey, New York and Pennsylvania grow by providing streamlined access to business loans and advisory services. EGF’s signature product, the EGF SmartLoan™, provides up to $100,000 in fast, transparent, and affordable financing through a secure online platform. Larger loans up to $500,000 are also available. EGF is a nonprofit organization and is certified by U.S. Department of Treasury as a Community Development Financial Institution (CDFI). Learn more