Small Business Loans: Traditional Banks vs. Online Lenders

By: David Halverson May 30, 2023

When it comes to securing small business loans, business owners are confronted with a myriad of options. The choice between traditional banks and online lenders poses a significant dilemma. This article provides a comprehensive guide, outlining key factors to consider when choosing between these two financing avenues.

The Evolution of Business Financing

Historically, traditional banks have been the mainstay of business financing. However, the digital revolution has seen a surge in the number of online lenders offering competitive alternatives. It’s crucial to understand the differences, benefits, and drawbacks of both lending channels to make an informed decision.

Traditional Banks: The Old Guard of Business Financing

Traditional banks have been around for centuries and have established their place in the business lending ecosystem. As a rule, they offer a variety of services including small business loans, credit lines, and commercial real estate loans, among others.

The Benefits of Traditional Banks

There are numerous advantages that come with choosing traditional banks for your small business financing needs:

  1. Relationship-building: Traditional banks often offer the opportunity to build a long-lasting and personal relationship with a banker. This can be beneficial when needing financial advice or assistance in the future.

  2. Comprehensive Services: These institutions offer a wide range of services beyond lending, including investment advice, treasury services, and insurance.

  3. Lower Interest Rates: Traditional banks generally offer lower interest rates compared to online lenders, especially for borrowers with good credit scores.

The Drawbacks of Traditional Banks

Despite the benefits, there are some notable drawbacks to securing small business loans from traditional banks:

  1. Lengthy Application Process: The loan application process can be time-consuming, often taking weeks or even months to get approval.

  2. Stricter Requirements: Traditional banks often have stringent credit score requirements and require collateral for certain types of loans.

  3. Less Flexibility: Traditional banks often have less flexibility in their loan terms compared to online lenders.

Online Lenders: The Digital Mavericks of Business Financing

Over the past decade, online lenders have emerged as a viable alternative to traditional banks. They are becoming increasingly popular due to their flexibility, speed, and convenience.

The Benefits of Online Lenders

The following are some of the key advantages of online lenders:

  1. Fast Approval Time: Online lenders can process loan applications and disburse funds much quicker than traditional banks, often within a few business days.

  2. Flexible Requirements: These lenders usually have less stringent credit score requirements and may not require collateral for certain loans.

  3. Greater Accessibility: Online lenders are accessible 24/7, allowing business owners to apply for loans at their convenience.

The Drawbacks of Online Lenders

While online lenders have many advantages, they also have certain drawbacks:

  1. Higher Interest Rates: Online lenders typically have higher interest rates than traditional banks.

  2. Lack of Personal Relationship: Online lenders don’t offer the same level of personal relationship that traditional banks do.

  3. Limited Services: Unlike traditional banks, online lenders usually focus solely on lending, offering fewer additional services.

Making the Choice: Traditional Banks or Online Lenders?

In determining whether to choose a traditional bank or an online lender for a small business loan, several factors come into play. For instance, consider the urgency of the loan, your credit score, the need for a personal banking relationship, and the interest rate you can afford.

The Future of Small Business Financing

As technology continues to evolve, so will the ways in which small businesses secure financing. It’s likely that traditional banks and online lenders will increasingly incorporate features from one another, blurring the lines between these distinct entities. As such, small businesses may find themselves with even more lending options that offer the best of both worlds.

Regardless of future trends, it’s paramount that small businesses meticulously evaluate their needs and circumstances to make an optimal decision. Both traditional banks and online lenders have their own unique strengths and weaknesses. The choice will ultimately depend on what best aligns with a business’s unique requirements and objectives.

Traditional Banks: A Timeless Resource

Traditional banks, with their personal service and comprehensive financial offerings, will continue to serve a significant segment of the small business market. Particularly for those with strong credit scores and businesses seeking lower interest rates, traditional banks will remain a compelling choice. Furthermore, for entrepreneurs who value personal relationships and have a broad spectrum of financial service needs, traditional banks can provide a one-stop solution.

Online Lenders: The Frontiers of Flexibility and Convenience

In contrast, online lenders will continue to grow in popularity, particularly among tech-savvy entrepreneurs who prioritize speed, convenience, and flexibility. For businesses with less-than-perfect credit scores or those in need of rapid financing, online lenders are an ideal choice. Their simplified application processes and immediate decisions make them attractive to businesses operating in fast-paced industries.

Concluding Thoughts on Small Business Loans

In conclusion, the decision between securing a small business loan from a traditional bank or an online lender hinges on the unique circumstances and needs of your business. Both entities offer distinct advantages and come with certain drawbacks. The key is to understand these aspects and assess your business needs accurately. Be it the comfort of a longstanding relationship with a bank or the ease and speed of online lenders, your choice of lender can significantly impact your business’s growth and success.


Yes, many online lenders are trustworthy and regulated by financial authorities. However, like with any financial decision, it is important to do thorough research and choose a reputable lender.

While it may be more difficult, it's not impossible. Banks look at a variety of factors beyond just credit score, such as business history and potential collateral. However, online lenders often have more flexible credit requirements.

Online lenders generally offer the fastest approval and disbursement times. Some can process applications and provide funds in as little as a few business days.

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