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Instant Business Loans | What do you need to know?

Chris Grundy
May 24, 2017

Online sellers and other small businesses that do business online are no longer at a disadvantage when it comes to obtaining financing to support and expand their operations. Instant business loans provide a solution unmatched by traditional lending institutions in terms of convenience, flexibility, and likelihood of being approved.

What Are Instant Business Loans?

Instant business loans are a great way to leverage the power of crowdsourcing for the benefit of online sellers who need external financing. They are offered through peer-to-peer lending platforms like Bitbond, Kabbage, PayPal Working Capital, Lending Club, Prosper, and others. These platforms act as an intermediary between people who need to borrow money and investors who have money to lend.

They charge a fee to handle the application and approval process, publish the application for crowd sourcing, fund the loan and disburse the funds to the borrower, collect the loan payments from the borrower, and repay the investors. It’s a concept that originated in the UK and has gained growing popularity around the world, though Bitbond is currently the only peer to peer lending platform that operates globally andprovides instant business loans.

Instant Business Loans are a great way for small businesses to get the working capital they need and offer distinct financial advantages for both borrowers and lenders. Most significantly, because the lending platforms operate online and don’t maintain large physical offices and staff, their low overhead permits them to charge relatively little for their services. Consequently, the interest rate paid by borrowers is typically lower than the rates charged by traditional banks, and the return to investors is usually higher.

When Is an Instant Business Loan Appropriate?

Online sellers often start out by self-financing, either from personal savings or money invested by family and friends. As sales begin to pick up and revenues grow, taking the business to the next step is likely to require more money than sellers can come up with on their own. The undeniable reality is that it takes money to make money.

Funds may be needed to:

  • Purchase additional inventory to generate additional sales revenue
  • Bridge the time gap between making sales and collecting on accounts receivable
  • Provide a cushion to accommodate seasonal ups and downs in revenues
  • Take advantage of short-term business opportunities, such as financing large orders or buying up discounted inventory
  • Hire staff, invest in equipment, or make other improvements that will help grow the business

The one thing that should not be financed is debt. Borrowing money to pay existing bills and cover basic operating expenses can burden a small business with additional debt. External financing, whether through an instant business loan or traditional bank loan, can help a healthy small business grow and become more successful, but it can sink a business that is already struggling.

How Much Can Be Borrowed?

Different lending platforms offer different maximums, generally in the €5,000-€50,000 range for online sellers. The amount available to any given borrower through an instant business loan depends on two key factors: the borrower’s creditworthiness and income.

This is where one key advantage of instant business loans comes into play. Traditional banks are reluctant or ill-equipped to take into account income earned through an e-commerce platform like Amazon, eBay, or Etsy. However, many peer-to-peer lending platforms enable potential borrowers to connect their seller accounts to provide access to their sales history for income verification purposes. They may even take into consideration a seller’s social media presence and online reputation.

How Much Should Be Borrowed?

It’s never a good idea to borrow more than is actually needed and can be comfortably repaid. It may be tempting to request a large loan to realize an ambitious expansion plan, but it makes far more sense to borrow incrementally. If the first instant business loan produces the desired results, there’s no reason the seller can’t apply for another one, even before the first one is paid off. It’s all a matter of numbers, balancing the potential benefits and risks of taking on additional debt.

What’s the Interest Rate on an Instant Business Loan?

The Interest Rate that will be charged depends primarily on the borrower’s creditworthiness, so it varies from loan to loan as well as from lender to lender. The interest rate is calculated as a percentage of the amount borrowed and is expressed as the APR, or annual percentage rate.

Using the APR makes it possible to compare the cost of different loans, regardless of the loan amount, repayment options, or maturities. Bear in mind that the total cost to the borrower includes any fees imposed by the lender in addition to the interest charged.

What Repayment Options Are Available?

Lending platforms like Bitbond offer loan repayment options specifically designed to meet the needs of online sellers. The two most common repayment options are:

  • Equal monthly installments consisting of both interest and principal repayment. (Such loans are known as term loans, installment loans, or amortizing loans and are best for those with a relatively steady income stream.)
  • Repayment of the principal amount in one payment by the loan’s maturity date. (Referred to as balloon loans or bullet loans, they may require regular interest payments over the life of the loan or a lump-sum interest payment at maturity.)

An instant business loan may also be in the form of a credit line, which enables the borrower to access funds as they are needed. Interest is charged only for the period that the money withdrawn by the borrower remains unpaid, and the repayment terms vary from one lending platform to the next. One advantage of a credit line is that the borrower may withdraw more money to meet new challenges or take advantage of new opportunities as they arise.

Regardless of which repayment option applies, the amount of interest paid by the borrower depends on the length of the loan’s term as well as on the interest rate. Obviously, the longer the term of the loan, the more the borrower will end up paying in interest. With loans that are repaid in installments, a longer term has the advantage of smaller monthly payments. Repaying an instant business loan early, before its maturity date, can save the borrower some money, but some lenders charge an early repayment fee or charge the full interest amount anyway.

Who Pays the Fees Charged by the Lending Platform?

Peer to peer lending platforms make their money by charging fees for the services provided to both borrowers and lenders. Borrowers pay a fee that can be as little as one half percent of the loan amount to as much as five percent, depending on their credit standing. Most peer to peer lending platforms also charge a minimal fee to the investors that fund a loan, often in the form of an annual service fee, though Bitbond does not charge a lender’s fee.

What’s the Impact on the Borrower’s Credit Rating?

Applying for a traditional bank loan invariably entails a hard credit inquiry by the lender, which has a negative impact on the individual’s credit score. Borrowers can avoid a “ding” against their credit score by applying for an instant business loan only from a lending platform that does not make hard inquiries. If that’s not feasible, it’s wise to apply to no more than one or two lenders.  

Is Collateral Required to Secure an Instant Business Loan?

Instant business loans obtained through an online lending platform are typically unsecured. That doesn’t mean that the lender has no way to collect on loans that are not paid according to the loan agreement. Many lenders require access to a bank or PayPal account from which they can deduct funds owed them. Borrowers typically are held personally responsible for repaying the loan, even if it was taken out in the name of the seller’s business entity.

Defaulting on any loan usually results in debt collection actions that are not only unpleasant but can also cause long-term damage to the borrower’s credit. Before submitting an application with a particular lender, it’s extremely important to find out what happens in the event of nonpayment.

How Long Does It Take to Get Approved?

Quick approval is a hallmark and key advantage of instant business loans. It can take as little as a couple of hours to get approved, and the money can be in the borrower’s account the same or next day in many cases. Even when it takes longer than that to process an application and fund a loan, it’s nearly always considerably faster than possible with a traditional bank loan.

All in All …

Instant business loans offered through peer to peer lending platforms open up new possibilities for online sellers to realize their vision of success. No longer subject to the biases of traditional lenders, they have access to the financing they need to compete and thrive in the global digital marketplace.

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