The process of getting a small business loan for an online business is mostly the same as if you run a brick-and-mortar operation. Both types of businesses typically face the same challenges when applying for funding, including identifying financing options that fit their needs and comparing key loan features This guide is meant to help you better understand how to overcome financing obstacles for your online business.
What is an online business?
An online business is any company that operates primarily or entirely on the internet. Cloud-based software services are a great example. So, too, are e-commerce shops, Etsy craft sellers, virtual tutors, and affiliate marketing. Their primary difference from “real-life” businesses is their medium. Both types of businesses often need extra funding to grow.
6 small business loan options for online businesses
There are dozens of possible online business loans and hundreds of lenders who offer them. The list below includes some of the best types of small business loans for an online business.
1. Personal loan
Though technically not a business loan, a personal loan may be more accessible to certain online business owners. If you run a new company with minimal sales history or your credit score is low, you might only qualify for personal loans. Despite the term “personal” in this loan type, you may use the money to fund your online business.
Personal loans are available from from certain online lenders, and traditional lenders such as banks and credit unions offer them as well. Though online lenders’ application and funds disbursement processes may be faster, traditional lenders’ personal loans may be more affordable. The rapid turnaround on some online personal loans may mask high interest rates that ultimately leave you with too much debt to be worthwhile.
2. SBA loans
The U.S. Small Business Administration (SBA) runs several loan programs you may be able to use to fund your online business. The most common types of SBA loans range from SBA Express loans to highly sought-after SBA 7(a) loans. In fact, the latter is generally considered the best possible loan for any business. If you are eligible and positioned to handle these loans’ main drawback – a lengthy approval process with a high bar to qualify – you should take advantage and apply.
SBA 7(a) loans are borrower-friendly because their their repayment terms are typically long, and their interest rates are competitive due to backing by the government. The result is low monthly payments that don’t typically crush your cash flow almost immediately after they boost it. Additionally, SBA 7(a) loans are highly flexible. You may use them to refinance debt, invest in working capital, or buy commercial real estate.
SBA 7(a) loans may be as small as $30,000 or as large as $5 million. You’ll typically have between 10 and 25 years to repay your loan. Your interest rate will usually be pegged to the prime rate or similar benchmark. This variable rate may be better in the long term – fixed rates usually increase your payments over time. Plus, since SBA 7(a) loans are fully amortized, the amount of interest you pay per month decreases.
3. Bank term loans
Despite their name, SBA 7(a) loans come from banks – the SBA guarantees these loans to lessen the lending bank’s risk. As such, bank term loans are often quite similar to SBA 7(a) loans, though their qualification criteria may be less stringent. They’re generally available in two types: short-term and long-term bank loans.
A short-term bank loan is one you repay within a few months. You’re likely best off using these loans to address your online business’s immediate needs, whereas long-term bank loans are better for growing your business over time. Long-term loans typically have repayment terms of at least 10 years.
Bank term loans may be advantageous because they’re similar to SBA 7(a) loans that require less paperwork, which may result in faster approval. However, short-term bank loans may have relatively high interest rates, and long-term bank loans come with fixed, not variable, interest rates.
Additionally, both bank term loans and SBA 7(a) loans require borrowers to have at least two years of business experience. If your online business is newer, other loans may be more accessible.
4. Business lines of credit
A business line of credit is a revolving loan rather than an installment loan like the three loans above. That means you won’t be responsible for monthly payments of equal, predictable amounts. Instead, you’ll have access to a certain amount of money, and you may use some or all of that money for any business expenses. You’ll only pay fees and interest on the money that you do use, and once you repay that money, it’s immediately available again.
Your line of credit may be especially useful to cover inventory, equipment, marketing, or payroll costs. Generally, you may qualify more easily than with most other loan types, though some lenders still require good credit scores and prior business experience. Another drawback: Some business credit lines set draw periods after which your funding becomes inaccessible. Typically, shorter draw periods mean higher APRs – and most credit lines charge high interest rates.
5. Invoice factoring
Let’s say your online business needs funding largely because most of your incoming cash is held up in your accounts receivable. In that case, instead of waiting for your clients to pay, you may contract with an invoice factoring company. This company will lend you the total sum of your unpaid invoices and then collect payment from your clients. The company will then take a fee upon collecting the invoices.
Invoice factoring may be a great choice if you need cash fast and you don’t qualify for other loan types. It’s also a great choice for obtaining small business funding that sets minimal restrictions on how you use your cash. However, the fees that invoice factoring companies charge are typically higher than with SBA 7(a) or bank term loans. Factoring companies also take over your communications with your clients, and that loss of control may feel uncomfortable.
6. Business credit cards
If you need funding for your online business in a pinch, business credit cards may be a reasonable solution. You may be able to get approved within minutes, and it’s uniquely convenient to have your revolving loan on a card in your pocket. Plus, many business credit cards give you spending rewards for all your purchases, and over time, these rewards may accumulate into extra cash. Cards may also help you build the credit you need for larger loans.
However, business credit card APRs are typically significantly higher than those of installment loans. Credit card interest rates may also increase depending on how you use your card. Of course, you avoid paying interest if you repay your balance within your billing cycle, but the risk remains. And there’s another risk unique to credit cards: Bad actors may steal information and use it. That’s not necessarily true with other loans.
Business credit cards are largely similar to business lines of credit – you borrow money from a revolving line and only pay for what you use. However, business lines of credit often have much higher credit limits and potentially lower interest rates.
How to choose funding for your online business
As you choose the right small business loan for your online business, you should consider the following factors, and weighing them all may help you make the right call.
1. Loan amount
If you need to cover $30,000 of payroll, an SBA 7(a) working capital loan in that amount could help. If you were to take out a $300,000 bank loan, you’d still need to pay for the $270,000 you don’t use. Choosing a loan amount as close as possible to what you actually need may minimize your loan’s cost.
2. Likelihood of approval
If you clearly meet all the qualification criteria for a loan, then you may consider applying for it. Otherwise, you should ask the lender or a small business finance expert whether applying is worthwhile. You might get a firm no, which means you may save time applying for a loan you never would have gotten. After all, if your credit score is low and your online business is new, it makes no sense to apply for certain loans.
If you get a maybe, try to find other loans for which you know you qualify. If you’re interested in SBA 7(a) loans or bank term loans, check to see if you pre-qualify. If you do, then you might be able to get the large-dollar, low-cost funding you need.
3. Funding speed
Typically, it’ll be a while before you get approved for SBA 7(a) or bank term loans. After you’re approved, you’ll likely have to wait a bit longer until you actually receive your funds. Your patience may pay off – you’ll get the best loan terms possible – but if you need cash now, these loans might be non-starters. Personal loans and business credit cards might be better instead, though their terms will be less favorable. If you don’t need cash immediately, wait it out.
4. Cost
Let's say you’re choosing between a 10-year loan that distributes funding months from now and a one-year loan you start using tomorrow. While the latter is more convenient, it’s likely more expensive – most rapid-turnaround options charge higher interest rates. Plus, your monthly payments will be larger. That’s why estimating the potential cost of any loan is important.
Some numbers should help you see why. Repaying $60,000 over one year requires $5,000 monthly payments. Over 10 years instead, your monthly payments would be just $500. These numbers don’t account for interest, either – and in almost all cases, longer-term loans come with lower interest rates.
One workaround may be a business line of credit or a credit card. These funding options may be no-fee if – and only if – you always repay your balance each billing cycle. However, if you fall behind, the interest and fees may be so high that they pose a whole new set of problems.
5. Risk
Loans involve some uncertainty, asyou’re committing to the fact that you may be able to repay a large amount of money over time. The lender will also likely ask you to put up collateral or sign a personal guarantee.
SBA 7(a) loans, for example, typically require you to attach certain assets to your loan as collateral. The sum of these assets’ values must equal at least your loan amount. The lender may seize and sell these assets to recoup their losses if you default on your loan.
Other loans require a personal guarantee, which essentially puts up all your assets for seizure if you default. Choosing the right loan means more than evaluating how it could boost your business – it also means considering how it could harm your company.
Find the right loan for your online business
The above small business loans for an online business are great options, and the best fit for your needs will vary based on your situation. See if you pre-qualify today.
FAQs
What is the best loan option for an online business?
The best financing option depends on how much capital you need, what you plan to use it for, and how predictable your revenue and cash flow are. A term loan may make sense for a specific investment, such as expanding inventory or purchasing equipment, while a business line of credit may provide more flexible access to working capital. An SBA loan may be worth considering for eligible businesses that need longer repayment terms or larger amounts of capital. Online businesses should compare interest rates, fees, repayment terms, qualification requirements, and funding speed before choosing a lender.
Can an e-commerce business qualify for an SBA loan?
Yes. An e-commerce business may qualify for an SBA-backed loan if it meets the applicable SBA and lender eligibility requirements. The fact that a business operates primarily online does not automatically prevent it from receiving financing. Lenders generally consider factors such as the business's financial history, cash flow, creditworthiness, ability to repay the loan, and intended use of proceeds. A well-organized online business should be prepared to document its revenue, expenses, tax returns, bank statements, and other financial information.
What credit score is needed for an online business loan?
There isn't one universal credit score requirement for an online business loan. Each lender establishes its own eligibility standards, and some may consider both the owner's personal credit and the business's credit history. Stronger credit may improve the range of financing options available and may help borrowers qualify for more favorable terms. However, lenders may also evaluate factors such as revenue, time in business, cash flow, existing debt, and repayment capacity, so credit score is only one part of the application.
How is funding an online business different from funding a physical store?
The underlying financing principles are similar, but an online business may have a different financial profile and collateral base. An e-commerce company may have significant inventory, digital assets, advertising expenses, or platform-based sales rather than commercial real estate or physical storefront equipment. Lenders may place greater emphasis on documented online revenue, payment processor activity, bank deposits, inventory, and cash flow. Online businesses should be prepared to provide clear financial records that demonstrate consistent revenue and the ability to repay financing.
What is the fastest way to get funding for an online business?
Funding speed varies by lender and financing type. Online lenders may offer faster application and funding processes than some traditional lenders, particularly for smaller financing requests. Business lines of credit and other streamlined financing products may also provide quicker access to working capital.
Should an online business use a line of credit or a term loan?
A line of credit generally works well when an online business needs flexible access to working capital and doesn't know exactly when expenses will arise. The business may draw funds as needed and pay interest on the amount it uses, subject to the lender's terms. A term loan may be better for a defined, one-time expense with a predictable cost, such as a major inventory purchase, equipment investment, or expansion project. Consider the purpose, amount, repayment timeline, and cash flow impact before deciding which option fits your business.
