Within a few years, online lending has become a massive financial industry that is rapidly changing how small business owners seek out funding. Obviously, most small business owners want to be careful in regards to taking out loans, so there can be some unease about this new universe. Armed with some knowledge, you can see how these products can work for you. You might find online lenders to be faster and easier than anything you’ve experienced before.
Common Misconceptions About Online Lenders
Like everything involving the internet, there are some wild misconceptions flying around about how online lenders operate. And while there are undoubtedly more than a few unscrupulous actors out on the World Wide Web, there’s no reason why savvy small business owners shouldn’t take advantage of the range of lending products available online. Just be prepared to read and compare, and be careful with where you type in your information.
They’re All Predators
In the long aftermath of the 2008 financial crisis, many Americans lost trust in lending institutions—and understandably so. While predatory lending is still an issue around the country, many aboveboard lenders operate online that have offerings for small businesses. However, you should always do your due diligence: read the terms of any loans closely, and don’t be shy with questions. Some red flags include prepayment penalties and hard-to-understand repayment structures. Also look out for offers that seem too easy in general, if it seems too good to be true, it very well might be.
Your Credit Score Will Suffer
Most online lenders only do a so-called “soft pull” on your credit report to see if you qualify. Such an action won’t hurt your score. Although taking out new lines of credit can dampen your score a bit at first, growing your credit-to-debt ratio and repaying a loan on time will actually improve your credit score over time.
Only Those Rejected By Banks Apply for Online Loans
There’s a whole world of reasons why a small business would apply for alternative loans instead of traditional term loans from a bank. In most cases, businesses applying for term loans have been operating for years and are seeking at least $100,000 or more. Additionally, the repayment period can last decades. Not to mention, the application process is purposefully onerous. If any of those qualifications seem less than ideal for your company’s needs, you are one of the many small business owners who should look into online loans.
Online Lenders Are Unregulated
While there is less regulation overall for the wide span of online and alternative lenders, it isn’t the Wild West—if you’re smart. Some ways to ensure that there is some sort of oversight over your lending options is to utilize a quality lending platform, like Lendio, and use products that are connected to a known bank or credit company. If you are deeply concerned about regulations, you can apply online for loan products that are partly backed by the Small Business Administration, known as SBA Loans.
Some Realities to Consider
Online lenders operate differently than physical banks, so you should be prepared for new situations. Here are some aspects of the online lending process that you may encounter.
Higher Rates Are Common
The reason why traditional term loans from a bank are so sought after by some small business owners is that banks generally provide the best interest rates. However, the application process is arduous, the repayment period is extremely long, and the minimum loan amounts are usually pretty high. Because Cheddar Capital make decisions quicker and often for smaller amounts of money, the interest rates are typically higher. Still, the rates won’t be astronomically different. When making decisions, keep a close eye on interest rates and calculate the total you would end up spending after the loan is repaid.
Loans Are Structured Differently
Online lenders typically offer wildly different structures than a traditional term loan, but this might be a benefit in some cases. Some loans, like ACH cash flow loans, are based on your daily sales, while others, like equipment financing, lend you money so you can buy needed machinery. Identify your business needs and then research lending products that would help you reach those needs.