Technological advances have revolutionized every industry – especially the banking world. With the rise of Fintech, more and more businesses are able to leverage significant borrowing opportunities, thanks to the ease and convenience of digital lending. For many reasons, startup financing continues to benefit from digital loans. Digital lending offers quick access to finance at competitive rates, often more competitive than traditional lenders, and certainly, there’s the absence of red tape, the endless application process, face-to-face meetings, and then waiting what feels like an inordinate amount of time for approval.
Digital loans are also cheaper because they reduce the lender’s operational costs as everything is completed using artificial intelligence and electronics. Due to those savings, entrepreneurs benefit from lower interest rates and fees.
So, startups nowadays are using digital loans as a quick method to gain the finance they need to scale their businesses quickly – and as the business world functions at such a dramatic pace, that need for speed is necessary to gain a competitive edge.
Comparing Loan Options – A Guide to Finding the Best Deals
That said, there are thousands of lending options available online – which can make it daunting and complex, so how do entrepreneurs find the best deals?
There are many useful loan comparison websites online that help businesses (and individuals) find the right deal for their needs. These websites present a list of results that the borrower should carefully assess. Most important is checking the interest rate, terms of loan, and fees attached, but it’s also equally important to check out the loan company themselves to make sure they’re reputable (Luotto is a well-known, well-regarded loan company). As tempting as it is to just choose the first product displayed on a list, this is not advisable! Take time to conduct due diligence because for every potential good deal – there’s possibly an even better deal further down the list!
Here’s what to think about:
- Know what’s affordable. There’s no point in taking out a loan for startup financing without understanding your budget, outgoings, overheads, and other expenses. If not, you’re setting yourself up to fail.
- Understand interest rates and look for those with a lower interest rate (check for hidden costs). A fixed rate means an interest rate stays the same throughout the loan duration. Variable means the rate could change according to the market. Fixed rates are easier to manage. Variable rates come with greater risk as they could quickly increase over the life of the loan.
- Compare terms from different lenders. Some lenders offer more favorable repayment terms than others (for example, lower fees or flexible repayment schedules).
- Be aware of the true cost of borrowing because often, there are hidden charges that might not be immediately obvious – read the small print! Look at the Annual Percentage Rate (APR), which includes the interest rate and additional fees, so you are well aware of the total loan cost. Also, check if there’s a loan arrangement fee (payable at the start of your loan) and if there’s a penalty for early repayment.
- Think about the length of the term. A short-term loan often comes with higher interest rates than a long-term loan, decide which is best for your business’ needs.
- If you use a loan comparison website, always enter as much information as possible and ensure it is accurate. Some loan comparison websites perform a “soft” credit check, which won’t harm your credit score. Check that you’re not subject to a more stringent credit check before choosing the right loan for you, as it might impact your overall score.
Understanding Credit Scores and How They Affect Loan Approvals
Credit scores are very important because they affect eligibility. A good credit score means you’re more likely to get the amount of financing you want, at favorable interest rates and length of term. A low credit score could mean you’ll be refused, although some loan companies don’t greatly penalize you for a lower score – for example, Kulutusluotto.
Put, a credit score is a number assigned to an individual or a business to help lenders understand the risk of borrowing money for startup financing. These are calculated through credit scoring models based on your history of handling money. They predict whether you’ll be able to manage payments or whether you’ll miss repayments. Most scores range from 300 to 850; the higher the score, the less risk is attached. Every person who owns or owns a credit card has a mortgage, a bank account, or a financial product and has a credit score. If you have a poor credit score, that doesn’t mean you can’t improve it over time. Some people and businesses have low credit scores but can still get startup financing, although traditionally, the costs and fees are greater than those applying for a loan with better credit scores.
Why Business Loans Are Critical for Startup Growth
Most startups require a business loan at some point during initial growth – or they reach a point where it’s impossible to scale without financial input. Business loans offer the perfect opportunity to fund a new company because they’re structured especially for that purpose. What’s more, many loan companies (including digital lenders such as Lainaa) offer business advice, too – and that type of service is often invaluable for small startups who are struggling to cope with rapid growth or who see plenty of potential but need money and advice to reach that potential.
Of course, for businesses that are right at the initial stages of startup, there’s normally a need for money to cover costs, hire staff, and get products or services up and running. As new businesses can take time to generate revenue, a business loan is critical to help get it off the ground.
Personal Loans vs. Business Loans – Which One Should Entrepreneurs Choose?
Choosing a personal loan for business purposes over a business loan may be suitable for your business, but only if it’s for a small amount. The problem is that an unsecured personal loan (a loan that doesn’t require collateral) won’t allow large startup financing, and if you decide to take out a secured personal loan with a large asset such as your home as capital, you run the risk of losing it if your business fails.
Business loans are set up exactly for business! Plus, you can borrow a larger amount, and your company begins to build up a credit history, which makes future borrowing easier. You also get the added advantage of business advice from some lenders (not all) – and this can be extremely attractive.
The Future of Digital Lending and Its Impact on Business
Digital lending has transformed the banking world and brought so much opportunity for startups and established businesses alike. The future will see even greater innovation in the industry, such as embedded finance, where lending will integrate itself into more everyday products and services. Open banking will also allow borrowers to share their information with multiple lenders through a secure system. Therefore, there will be greater access to improved loan offers. Thanks to Fintech, there will be more personalization so lenders can tailor products to exact business (and personal) needs. Even though nowadays businesses (and individuals) can access money exceptionally quickly due to automation, that speed will grow to real-time lending, so startups and businesses can access startup financing immediately. In terms of security, this will continue to improve thanks to biometrics, AI fraud detection, and blockchain – and the unbanked population will be able to access digital lending thanks to blockchain and cryptocurrency.
To Wrap Up
The ability to access finance online has made a tremendous difference to young businesses, offering a faster, more streamlined alternative to traditional loans. As there are fewer barriers than traditional lending mechanisms, along with lower operational costs, digital loans are mostly more competitive than bank loans. This is helping new businesses to stay ahead in a fast-paced market. Loan comparison websites play an important role as they help entrepreneurs navigate online lending, but it’s crucial that attention is paid to interest rates, fees, and loan terms (especially to avoid hidden costs). The future could see online financial products removing the need for traditional lending from banks as Fintech continues to open a world of opportunity for the future – including real-time funding, better-tailored products, embedded finance, and enhanced security.
Image Credit: Photo by Sebastian Herrmann; Unsplash
