What Term Loan is Best for Your Business: Online Business Loans vs. Bank Loans

Online business lenders and banks both offer small business term loans. Here, we explore the difference between an online business loan and one from a bank.

Online lenders and traditional banks both offer small business term loans. However, the requirements, application process, and funding time can vary. So, one type of lender might be best for your business. In general, online business lenders offer speed and flexibility, while traditional banks might offer a lower interest rate but have a lengthier review process and stricter requirements.

How do online business lenders differ from traditional banks?

Online business lenders are often a type of alternative lender and may finance loans without accepting consumer deposits. For example, some online lenders use a peer-to-peer model to connect investors with business owners who need financing.

Traditional banks may also partner with online lenders or create their online small business funding platforms. However, online-only lenders may focus and specialize in a particular type of loan or customer, such as term loans for small businesses. Traditional banks may have a small business department, but the department only makes up a portion of its overall business. 

Where online business lenders tend to differ from traditional banks, the most is in the application and funding process. Many lenders heavily invest in underwriting technology to screen businesses quickly. As a result, you may be able to apply for an online business loan in minutes and get funding within one or two business days. 

Traditional banks that offer business financing may have more layers of bureaucracy to answer to So, the process could be clunkier, require more paperwork, and or necessitate in-person meetings. Banks may also be set up to better serve medium and large businesses than small business owners. 

Both online and traditional lenders offer term loans

Online lenders and banks provide different types of business financing, and one of the most common options is a term loan. 

Term loans can give you a large amount of funding, which you can quickly put to work in your business. You’ll then repay the loan in regular installments—generally, monthly payments, but some lenders require weekly or biweekly payments. 

You may find favorable terms with either an online business loan or a term loan from a traditional lender. Keep in mind, though, that each company may have its requirements and terms. 

For example, some lenders offer emergency loans to small businesses that have poor credit. But the loan’s high-interest rate and short repayment period can make it difficult to repay. Others offer low-rate loans with favorable repayment terms, and they can be a good option if you’re purchasing long-term assets, renovating a property, or hiring a new employee.

While the specifics will vary depending on the lender, there are a few general differences when you’re comparing online business lenders’ term loans vs. bank loans.

Online business loans vs. bank loans: How do they compare?

	Online Lender Term Loans	Traditional Bank Term Loans
Loan Amount	$2,000 to $1M+	$10,000 to $1M+
Repayment Period	3 to 60 months	12 to 84 months
Annual Percentage Rate (APR)	6% to 30%	3% to 13%
Application Time	Under 15 minutes	Several hours
Processing and Funding Time	1 to 2 business days	May take weeks or months
Requires a Detailed Business Plan	Likely no	Likely yes, for larger loans

What are the benefits and drawbacks of working with an online lender for a business loan?

Pros

• A streamlined application process with minimal paperwork
• Quick application processing and funding 
• Potentially low loan amounts 

Cons

• An online business loan has higher rates than term loans from traditional banks
• Shorter repayment periods can lead to larger monthly payments
• Can still require a year or two in business to qualify 

What are the benefits and drawbacks of working with a bank?

Pros

• Large loan amounts
• Potentially low-interest rates and fees 
• May offer a variety of bank- and SBA-backed loans 

Cons

• There may be strict criteria to qualify 
• The application process can be complicated, especially if you’re a sole proprietor
• It can take weeks or months to receive the funds

What should you look for in a small business lender?

Whether you’ve decided to apply for small business funding online or with a traditional bank, or want to review all your options, you’ll want to compare the lenders’ general lending process and loan terms. A few important points include:

• Funding time: How long will it take the lender to review your application, offer you a loan, and get the money into your hands. 
• Loan amount: Make sure the loan will cover your expenses but won’t require borrowing more money than you need. 
• Interest rate range: Knowing the range can help you gauge the best and worst terms you may be offered. However, you won’t know your rate until after you apply. 
• Origination fees: Lenders may charge an origination fee that’s taken out of the loan disbursement or added to your repayment amount. 
• Down payments: Most business terms loans don’t require a down payment, but you may need to put 10% to 20% down for real estate, equipment, or SBA term loans.
• Secured or unsecured: Many lenders offer loans that are either unsecured, secured by a specific asset, or secured by a general UCC lien on the business. Unsecured loans can be less risky, but you may have to pay more in interest.

By comparing lenders’ terms and processes, you can narrow down the list of potential lenders to a few top picks. You can then apply to see which lender offers you the best loan before accepting an offer and receiving the loan. 

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