Online Lenders Versus Traditional Lenders: Advantages and Disadvantages - SME Finance

Online Lenders Versus Traditional Lenders: Advantages and Disadvantages

For a very long time small businesses only had the option of visiting their local banks to access loans and other banking services but thanks to the rise of online lenders, not only do small business owners have more options they can enjoy some of the benefits that online lenders bring also.

But what are the advantages and disadvantages of traditional and online lending and how do they compare to each other?

We make the comparison here –

1. Loan Application – When you approach a traditional lender for a loan, you find that the loan process is usually long and complicated. Because of the many requirements, paperwork and bureaucracy involved, it can take months for your loan request to be approved.

On the other hand, the loan application process of an online lender is much easier. You simply create an account on their website or application and fill out your details and you can get your loan request approved between a few minutes and hours (usually less than 24 hours). 

2. What You Can Borrow – The amount you can borrow via an online lender is usually smaller and capped at a certain amount. This makes it difficult for businesses who would like to get a higher amount to access needed finance. This is not the case with traditional lenders who because of their large capitalisation can afford to finance large amounts of loan for business owners.

3. Loan Requirements – Online lenders are more flexible with their loan requirements than traditional lenders. They can approve loans for individuals and businesses with less than perfect credit score and even without collateral which makes them a good alternative for business owners that have been turned down by traditional lenders. As expected, traditional lenders are more stringent with their requirements for obvious reasons but this is a disadvantage because it makes for a more stressful process and longer loan approval time.

Related Article: 5 Digital Lending Platforms For Small Businesses

4. Cost of Loans – Online lenders offer more competitive or affordable interest rates and little or no service charge on loans when compared to traditional lenders. This may be because they have a lower cost of operation. They don’t have as many physical branches, employees and the cost implications that traditional lenders have. The cost of loans from traditional lenders are usually higher and usually accompanied by processing fees that reflect their high cost of operation.

5. Security – When it comes to the security of your data, traditional lenders may be less susceptible to being hacked than an online lender. This is because they have better infrastructure and capacity to protect the information of their users. While it is probably not likely than an online lender’s platform would be hacked and your information exposed, but they can be said to have a higher risk of being hacked than 

6. Regulation – Traditional lenders are highly regulated by agencies such as the Central Bank of Nigeria. This makes it more difficult for them to go under than an online lender. Since online lenders enjoy little regulation compared to traditional lenders, they are more flexible but also more likely to go out of business.

Given the pros and cons, which one are you more likely to approach for a loan? Online lenders or traditional lenders?

 

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