Types of Business Loans: How to Calculate the True Cost of an Online Business Loan

online loan for small to medium business

What is an online business loan?

Banks have been a traditional source of outside capital for small business owners.  Since the financial crisis of 2008, however, there has been growth in alternatives to small business loans, including online lending.  Online business loans represent a multi-billion dollar market that continues to grow although primarily unregulated by the federal government.

An online business loan is one way for qualified small business owners in need of immediate financing to obtain a short term loan for general working capital purposes.  The online application process is relatively straightforward and generally focuses on several key items:  

  1. Time in business (minimum of at least 1 year in operation on average)
  2. Average daily cash balance in bank account
  3. Revenues (minimum annual revenue of $50,000 - $100,000)
  4. Personal credit score (minimum credit score of 500-550) 

The criteria listed above are used by your typical online lender to quickly approve loans, utilizing financial technology to calculate risk.  Generally speaking, it takes less than one business day for a typical online lender to approve an applicant once they have completed their application. Some online lenders also use nontraditional metrics to review applicants, such as social media presence and sites that allow consumers to post online business reviews.

A typical online lender bases the amount of your loan approval on the size of your revenues (ex. $200,000 in revenues x 15% = $30,000 loan amount). The lender also determines the amount you must pay back, by using a “factor rate.” For example, a cash advance of $30,000 x 1.3 factor rate equals a $39,000 payback amount.  A typical online loan requires daily or weekly repayment.  Most lenders also charge an origination fee based on the loan amount.  This fee is usually deducted from the loan amount upfront. Look carefully for other hidden fees as well. Personal guarantees are normally required. 

Why use online business loans?

Online loans are a relatively new short term financing option for established small businesses that do not qualify for traditional bank financing for reasons including, limited amount of time in business, low revenue base, and/or weak personal credit. An online lender is willing to take on more risk of repayment in exchange for a higher interest rate.  Previously, these businesses relied on other very high cost loans, such as merchant cash advance arrangements.  Note: For companies just starting out, online loans are not a good option because you are not likely to meet the criteria to qualify. 

Small businesses must be aware that the tradeoff to the convenience and speed of a typical online loan is its high true cost.  When researching online loans, a borrower needs to consider both (1) the payback amount, (2) fees and (3) how rapid the payback period.

How do I calculate the true cost of an online business loan?

The typical online loan provider does not publish its an annual percentage rate (“APR”).  To calculate the true cost of the online loan, you need to have the following information:

Factor rate: The multiple of the cash advance that you will need to pay over the specified time period.

Example: $30,000 Loan Amount x 1.3 factor rate = $39,000 Payback Amount

Origination Fee: The percentage (%) of Loan Amount you are charged to process the loan.

Example: $30,000 Loan  x  2.5% = $750 Origination Fee

Repayment TermFrequency of payments

Example: # Repayment Days per Month x 9 month term = 270 days

Using this information with a loan calculator, you can learn the true cost of a typical online loan.  In this example, your annual interest rate appears to be 30% based on the Factor Rate of 1.3. However, when you consider the fact that you are making daily repayments, the calculated APR is significantly higher at 58.4%! Given the high APR, the typical short term online loan is not usually the best financing option available to you.  

Calculating true cost of an online loan

What are the alternatives to online loans?

Small business owners who are in need of working capital but do not yet qualify for traditional bank lines of credit may be eligible for financing from community lenders, such as Community Development Financial Institutions (“CDFIs”). CDFIs are primarily non-profit organizations that have access to lower cost community and economic development loan funds to provide smaller dollar loans to business owners who do not meet conventional banking criteria.  CDFIs are now offering business loans with an online loan application. Many CDFIs are also “Community Advantage” lenders that offer SBA loans up to $250,000. The U.S. SBA is the largest funding source for small businesses in the United States. The APR on CDFI and SBA financing options are significantly lower than the APR of a typical online loan!


If you are a small business owner in need of working capital, avoid the high cost associated with typical online loan products by exploring alternative, lower cost financing options available through your local CDFI.  You can start by learning more about Excelsior Growth Fund’s SmartLoan, which offers loans up to $100,000 with affordable monthly payments. 


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 atwww.excelsiorgrowthfund.org