Funding Your Small Business Online Is Easy, But Comes With Risk
In 2008, the Great Recession caused many banks and financial institutions to tighten their credit standards. As a result, a new breed of online lenders seized the opportunity to assist small businesses and new business owners with their credit needs, and often at a risk to small business owners.
Although the challenging financial landscape brought by the Great Recession has improved, most banks are no longer lending amounts under $250,000. As a result, for a small loan many small business owners feel their only outlet for capital is an online lender. Online lenders have made applying for a loan extremely easy, requiring little documentation and offering a quick decision. But their easy offer comes with a price, and business owners should pay close attention before they sign on the dotted line.
Know Before You Borrow: 5 things to consider when thinking about a Small Business Loan Online
- Know what the true cost of the loan is. What appears to be a 10% interest rate could easily be much higher and cost the borrower much more in interest during the term of the loan. Don’t hesitate to ask the lender the Annual Percentage Rate (APR) for your loan. If they can’t or won’t tell you in writing, then you may want to hit the brakes and do more research.
- Know what the fees are. Many times fees can and will be added to the loan. These fees not only cost you, the borrower, more, but also increase the Annual Percentage Rate. Again, ask questions and be wary if answers aren’t clear-cut and easy to get.
- Know what the repayment terms are. Although your loan may span several months, a year, or longer, some online lenders expect to receive repayments on a weekly or even daily basis. It is extremely important to fully understand what the repayment options are and how any applicable fee applies. Failure to repay accordingly could leave borrowers in a much worse situation than before the loan was made.
- Know how the loan is to be paid back. Most online lenders will require direct access to your bank account in order to draft payments. All borrowers should be extremely cautious in granting access to their bank accounts. Repayment plans that call for daily payments could cripple the cash flow of the business, making repayment difficult and negatively affecting your credit score.
- Know what you can afford. Before the loan documents are signed you must take time to review your cash flow situation and make sure you can afford the expected payment amount. A short-term capital injection may help solve an immediate need, but high repayment terms could create a much worse cash flow situation.
Small business owners must understand and be aware that there is definitely a tradeoff for the convenience and speed with which you can obtain financing online. Before you apply for an online small business loan from an alternative online lender, you may want to read a few helpful articles:
- Forbes: Why Online Small Business Loans are Being Compared to Subprime Mortgages
- Wall Street Journal: Know the True Costs of Short-Term Online Loans
- SBA: The Rise of Online Business Lending and What to Look Out For
Local lenders are a safer alternative to borrowing online
Before applying for an online business loan, consider reaching out first to your personal bank. If you don’t qualify for a bank loan, connect with a local Community Development Financial Institution like Pathway Lending as a safe borrowing solution for your business. CDFI’s like Pathway Lending are certified by the US Department of Treasury, and in our case, we’ve been partnering with banks since 1999 to get small business owners the funding they need when a bank loan isn’t an option.
Pathway Lending can fund your business with loans and lines of credit from $5,000 to $5 million. Because we’re a nonprofit lender, our flexible loans feature higher loan-to-value ratios, longer terms and payback periods, and more reliance on your opportunities, instead of just your historical performance. Plus, we’ll connect you with the in-depth business counseling, classroom training, and peer learning you need to start, expand, and successfully manage your business. Consider a safer, local alternative before you apply for a small business loan online.
Want to learn more about how a small business loan from a nonprofit lender like Pathway Lending works? Fill out our Contact Us form and a member of our team will reach out to you.