Clicking For Cash
Applying for a small-business loan has never been much fun. First you dress to impress, then you wear out your tire treads, as banker after banker gives you and your business the once-over. "You're begging for money, and they want you to guarantee them your firstborn," grumbles Cynthia Vernold, 34, co-founder of Santa Fe, N.M.'s Optical Insights, which designs imaging equipment for industrial use.
After an unpleasant experience seeking a real-estate loan in person, it's no wonder that Vernold, like a tiny but growing number of entrepreneurs, decided she would rather hit the Web than the road to look for capital. Not only does she do all her routine business banking online at onecore.com, Vernold also recently got her first online loan, for $50,000, through the Internet bank SierraCities.com.
Another entrepreneur, David Asseoff, had racked up $150,000 in credit-card debt over five years to build his 15-person company, Memolink, which markets products to college students. But he needed a $50,000 line of credit for working capital to expand his Lakewood (Colo.) business on the Web. While his local bank agreed to be his "lender of last resort," he assumed there would be reams of paperwork, weeks of waiting, and a high interest rate to boot. He didn't wait to find out what they'd say. Last April, Asseoff, 31, logged on to LiveCapital's Web site (www.livecapital.com) and submitted his credit application to more than 30 different lenders at once. In two weeks, the entrepreneur had his credit line. The best part: He's paying just 4.5 points over the prime rate, he says. "A lot of credit cards charge you 15, 16%," says Asseoff. "This will be more like 12 or 13%."
The online-lending market is clearly in its infancy. So far, less than 1% of small businesses are logging on to apply for loans, while about 8% of small businesses check their balances online, the most popular online banking activity for this crowd, says research firm PSI Global in a recent report. But the market is poised to expand in the next couple of years, analysts say, as more entrepreneurs discover the ease and convenience of doing all sorts of banking transactions online, and as competition drives down interest rates and administrative fees. "I think it's immensely helpful," says Regan Wong, an analyst with financial-services consultants TowerGroup, in Needham, Mass. In the past, if you got rejected by a bank, it was noted in your credit-bureau report. "Now, your application can be sent off to multiple banks, and if they turn you down, it doesn't show up."
In the past year, a host of online lending sites have sprung up to serve small businesses (table). These Web lenders, which are primarily focusing on unsecured loans and credit lines, fall into three broad categories:
Aggregators, such as LiveCapital, Oinke, and PrimeStreet, act as intermediaries for a variety of lenders. They're good for getting your story out to a lot of banks at once, but not so great if you need someone to talk with about your situation or you have blemishes on your credit history. Some of these sites purport to be "auctions" because various banks make bids for your business, but the banks usually don't know what deal their rivals are offering.
Traditional banks, such as Bank of America and Wells Fargo, have started taking loan applications over their own Web sites. It makes sense to choose one of these lenders if you like working with a bank that also has branch offices in your region. In most cases, though, you can't complete the whole process online.
Internet-only banks can often get you a decision as fast as the aggregators, and they claim to provide more personal interaction in the case of trickier loans. For example, rather than rejecting borderline applications automatically, they might telephone you to learn more about your company and to see if you're open to alternative forms of financing. SierraCities is the veteran, founded in 1994 as First Sierra Financial. Claritybank.com is just eighteen months old, with a handful of brick-and-mortar lending offices. Among its assets: a high-powered board member, former U.S. Securities & Exchange Commission Chairman Richard Breeden.
To be sure, online lending is so new that Net lenders don't yet have much of a track record. New players like PrimeStreet and LiveCapital refuse to say how many loans they've actually funded, although LiveCapital claims it has offered over $2.5 billion worth. As you might expect, the small-business owners who have taken the plunge tend to be young and Web-savvy, like Asseoff and Vernold. "The last thing I want to do is deal with traditional lenders," Asseoff says. "My time is valuable."
Of course, there's no guarantee any online lender will offer you a loan, never mind beat out its competitors with lower rates, as PrimeStreet claims in its advertising. Another fact of cyberlending: If you wouldn't pass a credit-scoring test--which ranks your creditworthiness on a number of criteria, such as your length of time in business--you probably won't qualify for one of these no-fuss loans. Online lenders generally employ the same credit-scoring models used by traditional banks. Plus, to protect against fraud, some lenders subject online borrowers to more credit scrutiny than they do their in-person borrowers.
How much money can you get? Frontier couldn't find a single online lender willing to lend over $250,000 without some extensive due diligence--not even Presidential.com, a unit of Bethesda (Md.)-based Presidential Bank, which teases on its Web site, "Got 2 Minutes? Get 2 Million." That's because most lenders don't want to rely on credit scoring alone for loans over $100,000. The credit-scoring system created by the data-cruncher Fair, Issac--perhaps the most widely used in the country--taps out at $250,000 for small companies. (For larger amounts, you should be prepared to supply financial statements and meet with a loan officer.)
SURFING FOR DOLLARS
To get an online loan, you'll start by filling out an online application form, which asks for such information as the age of your company and the reasons you need cash. If the site represents multiple lenders, they'll fetch credit information on you and your business and then compare your situation to the underwriting guidelines of each institution they work with. If you're lucky, you'll get a conditional approval right away for a specified amount, along with a request that you send more financial information by fax or snail mail. If all goes smoothly, as it did for Asseoff, you could close on the loan in as little as two weeks.
If you're applying via a traditional bank's Web site, don't expect the same whiz-bang technology used by aggregators and Internet banks. For instance, Bank of America accepts loan applications online, but you'll have to wait 24 hours for an answer--by telephone. Fleet Bank lets you apply and receive loan approval online. However, at least for now, you'll still have to go to one of their offices, located only in the Northeast, to sign the closing documents.
To increase your odds of getting a loan online, you should prepare by doing the same things you'd do before meeting a loan officer in person: clean up delinquencies on personal and business files, pay your bills on time for at least a year, and pay down your credit card balances so they're below 50% of your credit limit.
Of course, you can do everything right and still come up dry. Vernold, who needed a loan so she could afford to hire an accountant and a bookkeeper for Optical Insight, first went online in search of a $100,000 loan. Since 1996, she and her partners have funded the business with $60,000 in credit-card debt. Despite the partners' clean credit histories, when she applied to LiveCapital the only offer she got was for a $3,500 business credit card. Finally, Vernold got a $50,000 loan through SierraCities, where she got to speak with a live person on the phone after submitting her electronic application. But Vernold had to personally guarantee repayment, and she's paying 14.9% interest--pretty steep, considering her various credit cards are charging her from 9.9% to 16.9%. She's glad not to be running up more credit-card debt, though. "It looks much better to have a significant loan from one lender instead," she says. That shows other potential backers that her company has passed a tougher level of scrutiny than card issuers require.
CREDIT WHERE IT'S DUE
Clicking for cash may be eminently more civilized than groveling in public. But the limitations of dealing with a computer will give pause to many entrepreneurs. If your company already has significant debt, it will show up on your credit score, raising warning flags. Or, if your company is too new to have a paper trail of promptly paid invoices, you could be at a disadvantage. "Anything that isn't a no-brainer will benefit from some human interaction," says Laura Starita, an analyst with the Gartner Group.
And as your company grows larger, your financial needs are likely to grow more complex, too. So, you'll probably want to shake your banker's hand, sit down over coffee, and talk at length about your business and your needs for the future. "If a business is over 6 million or 10 million in revenues, you really need that personal relationship," says Richard Parlontieri, chairman of eBank, another of the Internet-based banks. For instance, a bricks-and-mortar banker might help you arrange more complex financing, and can waive fees like overdraft charges in the meantime. So, by all means, give high-tech high finance a try. But don't throw out your good clothes just yet.
To learn about other types of online financing, click Online Extras at frontier.businessweek.com