Business Lines of Credit: Traditional Bank or Online?
Writen by: Pretha Yasmin
Online lenders can provide faster approval times on average for a business line of credit than a traditional bank or credit union, but traditional lenders may be able to offer lower interest rates. Both alternative and traditional lenders can be good places to get financing from, so deciding between the two comes down to:
- Your cash flow and financial stability.
- Your time in business.
- Your desired financing amount.
- Your available collateral to secure the line
- Your preference for in-person versus online banking.
Both can offer revolving lines of credit, meaning it renews when the balance is paid down, or a terminating line, where the line closes after a one-time purchase like a piece of equipment.
Each lender will be different regardless of whether you go traditional or alternative, but going in with a baseline knowledge of what to ask and expect before you start the application process can save you time and money. That’s where we come in.
Below you’ll find a quick comparison table between the benefits and disadvantages of taking a business line of credit with a traditional lender and an online one, as well as some situations where one will be better than the other.
How the two are different
Your situation will be different from a different borrower, so depending on your creditworthiness, financial history, and the items the lender uses to evaluate your application is what determines what your business line of credit will look like. Here’s what you’ll want to know so that if you get approved, you can better negotiate interest rates, ceilings, withdrawal fees, and other terms.
| Traditional Lenders | Alternative & Online Lenders | |
| Interest rates | Lower | Higher |
| Spending limits | Higher | Lower |
| Speed of approval | Longer (up to a couple weeks) | Shorter (can be as fast as 24 hours) |
| Requires a longer financial history | Yes | No |
| Paperwork | More | Less |
| Flexibility with terms | Less | More |
| Reports to the credit bureaus | Sometimes | Sometimes |
| Relationships matter | Yes | Yes |
Traditional lenders are more risk-averse, so they may not approve a new company or one with a shaky financial history, but when they do approve a borrower, they’ll likely offer a better interest rate than an online lender for a business line of credit. The online lender will be more flexible for companies that do not have a long history, as they may use other metrics to create a financial and risk forecast which can improve a borrower’s chance of getting approved.
If the borrower has a long-standing relationship with the bank, the relationship may let them get better terms than an online lender that does not offer business checking accounts or ways to keep relationships growing. The multiple accounts lets the lender have more opportunities to make money, and they can gauge risk because they have access to more financials, and this is something an alternative lender may not be able to do.
The lender may require the borrower to come to a branch in person, and there will be more paperwork, making it a hassle to apply and get approved. Alternative lenders will have software and systems to process the transactions online, making it simpler and faster to get approved for a business line of credit compared to a large bank or credit union.
Both will likely report the line and payments to the business credit bureaus, which can have a positive or negative impact on your business credit score. Both can be flexible with the terms, but the borrower will have more wiggle room with an online lender if there’s no previous relationship or long-standing financial history.
As you can see, both providers are similar, and that’s where situations matter.
When to choose one over the other
Still not sure if you should go to an online lender or try a traditional financial institution for your business line of credit? Here are a few common scenarios where one will be better than the other.
New businesses and startups
Traditional banks and credit unions are more risk-averse, so startups and newer businesses will not have the financial history and may not have the cash flow to offset the risk, making alternative and online lenders the only option for a business line of credit. Online lenders will look at a variety of metrics like bank statements, cash flow projections, credit scores, and more. This is why an alternative lender is better for most new businesses and startups that want a business line of credit.
Needing the line quickly
If you need to move fast, online lenders can approve and open business lines of credit faster than traditional lenders. The process is virtual, does not require in person meetings, tends to have less paperwork, and you can submit any additional documentation virtually rather than waiting for the physical location to open. In some cases the traditional lender may require a branch visit, and you’ll be stuck waiting for an appointment which can also slow the process down further.
Keeping cash flow strong
While both traditional lenders and online lenders have fees including draw, origination, and annual renewals, large banks and credit unions typically offer lower interest rates and tend to be more flexible.
One of the main reasons is that larger financial institutions normally offer business credit cards, business loans, and other financial products where they can earn money, and they’ll want your business with those. And when you open a business checking or savings account with them, it provides them with more capital to deploy.
Larger amounts of financing
While each lender and each borrower is different, traditional banks and credit unions tend to offer larger spending limits on business lines of credit than online lenders. But, it depends on your company’s financial history, cash flow, business credit score, how much collateral you put down, and much more.
Lines of credit amounts can vary widely. It all depends on your business and the lender’s belief that you can make payments with interest on time and without going into default.
Pro-tip: If you don’t have enough collateral to secure the business line of credit, offer a personal guarantee which is different from collateral to offset the lender’s risk.
Both traditional and online lenders can offer your company a business line of credit. Which one you go with will depend on how long you’ve been in business, how creditworthy you are, the amount of financing you need, the speed at which you need approval, and your preferences for technology. If you’re curious about what is available to you, click here and let our system match you with the top financial providers that cater to your company based on your industry and size.
SmallBusinessLoans does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.
