On Line Lending
March 1, 2016
The need for funding is often paramount for small businesses. Whether it is start up capital, working capital, growth funding or capital asset financing, enough money is an issue throughout an entrepreneur’s business life. I always preach- go to your bank or credit union or other conventional lender first. You need financial stuff other than loans throughout your business life. Only the banking types can provide those services and products. So, if you can get all you need on terms you can afford at your conventional lender- go for it.
Oftentimes, however, banks cannot provide small businesses with everything they need on terms they can afford. This does not necessarily mean your business is undeserving. Banks, credit unions, etc. live within very strict rules and regulations. Typically banks won’t lend to a pure start up, nor to a business with credit issues (declining sales, losses, high debt:net worth ratio or negative net worth, etc.), nor to a business whose credit report shows a pattern of not paying bills nor to a business owned by an owner with credit problems. That’s where alternative lenders come in- alternative lenders range from local community based nonprofits to national or international online for profit and not for profit entities.
Beware- not all lenders are equal and not all on line lenders are equal. Even if the on line lender advertises that it is organized as a nonprofit, that it is sanctioned/sponsored by a government agency such as the US Treasury (CDFI/CDE), that it is an economic development/community development agency- it may not be the best solution for your business. No matter who the lender is- no matter how easy or fast the on line lending process is- check the facts. Look at the interest rates. Look at the loan term. Look at whether the interest rate is fixed or floating. See if there is a prepayment penalty. Check out the upfront, approval, closing, servicing fees charged in connection with the loan. Look at the sponsors, endorsers, references and testimonials. Call some of them. Evaluate and compare all of these factors before you decide that an on line lender is right for your business’ financing needs. And, yes, talk to your local banker if you have one. Most of the banking professionals will give you the “real story” about the reasonableness of an on line lender’s (or any alternative lender’s) offer.
Yes, sometimes you have no choice. If you have severe credit issues (personal or business), you may not be able to obtain conventional financing. Your conventional lender may not be able to meet your time frame. It is all about access to capital then and interest rate is not the key element. On the other hand, there comes a point of diminishing returns. If the costs or terms of the loan are so onerous that it puts your business at a disadvantage, it may not be worth it.
Due diligence is something the lenders do in determining if they will make a loan to your business. You should do your due diligence in choosing a lender, particularly an on line lending portal. Sometimes, you can get a “gut reaction” when meeting a lender in person. You don’t have that opportunity with on line lenders. So you have to be even more careful about doing your research into the lending organization and its products.
On line business lenders- for profit and not for profit- can be a great resource for your small business’ financing needs. But just as we say “buyer beware”- “borrower beware.” Do your homework before clicking that button obligating you and your business to debt repayment.