Business owners looking for a cash infusion may seek out online lending over more traditional banking options. Many may assume that online lending is a faster and easier way to access needed funds. But as with any other funding option, it’s essential to know the facts about online lending before jumping in.
Below, members of Forbes Finance Council offer 15 tips for business owners looking to explore online lending options. They explain what to look for in a lender and what to watch out for before you sign any virtual paperwork.
1. Read The Terms And Conditions
Entrepreneurs must thoroughly research the lender’s offering to be sure the product and the associated terms and conditions suit their financial situation. They should also review the company’s client testimonials, look to see if there are any hidden costs or unusually high rates of interest, and determine if the lender provides recourse/non-course funding or collateral/non-collateral funding before entering into an agreement. – Pushkar Mukewar, Drip Capital
2. Use Online Resources To Find A Lender
There is a difference between “online lenders” and “finding lenders online.” Using online resources to research and match to the right commercial lender for your business is extremely powerful and is a tool that’s underutilized by business owners. The one thing you need to consider when using online resources to find a lending solution is to make sure the organization is reputable, transparent and experienced. – Matthew Bjonerud, Cerebro Capital
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3. Understand The Timeline Difference
Most business owners know how to utilize a cash infusion, but when applying through traditional lenders, they’re planning a month or two in advance. The application process for online lenders is much simpler and funds can be received faster, allowing for immediate use. The borrower can reap the benefits of the funds quicker as they execute on their vision faster than anticipated. – Bernardo Martinez, PayPal
4. Look For An APR
If it sounds too good to be true, it probably is. Small-business owners considering online loans should look for an APR. Entrepreneurs should understand all the costs, rates and terms associated with the loan before signing any documents. Often, unscrupulous lenders hide exorbitant fees behind promises of quick cash and post numbers that look like interest rates but aren’t. Reputable lenders post APRs. – Carolina Martinez, CAMEO
5. Carefully Review The Fine Print
Online lending can be super fast and convenient. And who doesn’t love that? But what interest rates will you be agreeing to pay if you go the online loan route? You’d better be ready to give the fine print a very serious review if you want to avoid some shockingly high rates and being harshly penalized if you are late with a payment. – Khalid Parekh, FAIR Bank
6. Know The Interest Rates
Online lenders lend money if they can profit from it. They’ll also anticipate interest payments, which can pile up quickly. In extreme situations, the interest rate can reach above 100% APR. Before applying for an online loan, do your research. Never borrow money without knowing the interest rates and APR charges. – Neil Anders, Trusted Rate, Inc.
7. Ask About Industry Experience
Organizations seeking online lending do so for the speed of the process. First, ask the lender if they have worked with organizations in your sector. For some lenders, there are industries they prefer to avoid. Asking this question up front avoids wasting valuable time seeking a loan from a company that may not be willing to work with you, regardless of the speed at which you can repay it. – Jeffrey Bartel, Hamptons Group, LLC
8. Get Your Books Into The Cloud
Make sure your books are in cloud software and are up to date. Many online lenders offer expedited cash-flow-based loans by directly accessing cloud accounting data for quick assessments, instead of asking you to submit documents manually. Having your books in the cloud will ensure you’re prepared to provide online lenders access to your financial data for a faster turnaround time. – Nick Chandi, ForwardAI
9. Check Reviews And Credentials
Online lending has a ton of benefits for business owners. However, borrower beware: Not all online lenders are created equal, and many of them charge exorbitant interest rates and other fees. Check their reviews and see if they are a signee of the Small Business Borrowers’ Bill of Rights. – Sameer Gulati, ZenBusiness
10. Understand The Cost Of Capital
Make sure you have a solid understanding of the cost of capital. Most non-banking lenders you will find online will advertise to you that they can provide funds quickly; however, they also tend to be very expensive. Avoid taking expensive debt to solve short-term liquidity needs, as it may result in long-term hardship. – Sean Frank, Cloud Equity Group
11. Talk To Your Banker First
Opting for online lending versus traditional lending platforms can crush your cash management. The APR for some of the lenders in this space ranges from 29.9% all the way to 97.3%, and loans sometimes come with daily withdrawals from your bank account. Before you borrow online, talk to your banker, review your options for personal cash infusions and understand the risk. Informed decision making equals success. – Cynthia Hemingway, Fourlane, Inc.
12. Be Prepared For Fewer Consumer Protections
Many online lenders don’t offer you the customer protections banks do. The trade-off is you can probably get more and quicker money from an online lender—granted at a higher price (interest rate and fees) than a bank. The difference is that when times get tough, these lenders are more likely to call back your debt earlier than you expected, leaving you exposed and without the funds you need. – Aaron Spool, Eventus Advisory Group, LLC
13. Understand Potential Liability
Understand what you are signing and who is responsible for repaying if things don’t go to plan. Most online lenders charge high interest rates and require personal guarantees that transfer liability in the event of failure to you, not your business. If you are resorting to high-interest, short-term lending options to keep your business alive, it may be time to rethink your business strategy. – Joseph Orseno, Tiltify
14. Review The Various Online Lending Options
Traditional business lending is based mainly on business and credit history. It can also take quite a bit of time to go the conventional route. Online business lending will always be the quickest route. Some companies specialize in loans for bad credit, but the rates can be very high. Some lending programs use merit-based underwriting that does not rely heavily on personal credit scores. – Jared Weitz, United Capital Source Inc.
15. Consider The Trade-Offs
While online lending may be the quicker and easier approach, there are trade-offs that must be considered. Online lenders typically charge higher fees and have higher interest rates. By securing capital online, you are missing out on an opportunity to enhance a business banking relationship. Stronger business banking relationships typically lead to increased access to capital over the long term. – Robert Reeder, GlassView