Bank Loan vs Online Loan: How to Determine Which One is Right for Your Business

Companies have a myriad of sources for their investment and lending needs. Gone are the days when the only option was to travel to the local bank and hope that a company was approved for a loan on the bank’s terms. Now, there are dozens of physical and online banks that provide business funding. No two banks or websites that facilitate lending are created equally. Companies need to look at their balance sheet, their credit history, and their desired tolerance for risk and interest before embracing one approach or the other.

Bank stability

Businesses benefit with a bank loan from the stability and trustworthy nature of many banks. A business can count on most banks treating their money responsibly. They know that they will receive agreed-upon funds on time and in the manner originally negotiated. This guarantee comes from the myriad of regulations that banks have to meet.  

Banks have to meet reserve requirements and file paperwork regularly with state and federal regulators to ensure that they have the money to make loans. They have a myriad of loan officers and accountants to assure that every penny is accounted for. A business does not have to worry about the stability or liquidity of their loan. They can let the bank sort out many financial details and spend their time focused on simply trying to make their loan and their business work.

Not all online lenders are regulated the same way. These lenders may not have the same capital or disclosure requirements as banks. They may also be able to increase their interest rates by more than physical banks are able to. An unscrupulous lender may cover their tracks and abscond to Russia or Eastern Europe with a person’s untraceable money.

Personal connections

Working with a physical bank gives an individual working with a business a personal connection. This personal connection is essential for working out specific details of the loan and finalizing a payment structure. A person at a bank may be able to share details about other actions a bank could take to help a business reduce their customer churn and ensure customer success.

He or she may be flexible with certain payments in hardship cases. Having a personal connection makes these negotiations significantly easier. Unlike online lenders where each individual is simply an account number, a physical bank often treats an individual as a friendly customer who might work individually with the bank in the future.

Low online interest rates

There are a number of benefits for companies working with banks. But there are also a handful of benefits specifically to working with online lenders. While physical banks often have barriers to entry and higher interest rates, online lenders have almost no barriers to entry. There will inevitably be an online lender somewhere available to give a company a loan it needs. Online lenders also have a lower interest rate than their physical counterparts. This lower interest rate stems from lower administrative and real estate costs. The online loan is often an attractive alternative for companies working in a niche market or needing a large loan with a poor credit history. A consulting business can help a company figure out which of these loan approaches is right for them.

Conclusion 

Businesses have to be careful when choosing between a physical or online lender. They need to make sure that they know their level of risk and their need for personal connections. Businesses also have to be certain what their maximum amount of potential interest will be. With this knowledge, a business can competently decide between embracing a loan from a physical bank or an online lender. 

Author Bio: Douglas Pitassi is a freelance writer and small business blogger.

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