The 21st century has made it much easier for small-business owners to access capital. Online lenders in particular can look like an attractive option to small-business owners looking for a quick cash influx, but it’s wise to be cautious.
While there are many reputable online lenders out there, there are also some unscrupulous actors as well as potentially costly “features.” It’s important to research carefully before making a commitment. Below, 11 members of Forbes Finance Council share critical details entrepreneurs should be aware of when considering taking a loan from an online provider.
1. There may be penalties for paying the loan off early.
Know your lender and be sure to read the fine print. Early on, we took an online loan at a ridiculous interest rate because we needed access to capital, but we failed to read the fine print. The only way to prepay the loan was to incur a penalty greater than the remaining balance. Start building banking relationships as soon as you start a company to avoid ending up in a pinch. – Robert Reeder, GlassView
2. You should check for contact information and a legal address.
To avoid lending scams, the first and most important thing for small-business owners is to perform their due diligence. Go through the process of identifying who online lenders are. For example, business owners should check lenders thoroughly and at least ensure they have the correct contact information and a legal address before exchanging their personal and business information with them. – Lijie Zhu, Dragon Gate Investment Partners
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3. There may be higher ‘risk-associated’ interest rates.
Online lenders usually charge a higher rate to offset the perceived increase in risk associated with not being able to meet the borrower face-to-face. Business owners ought to know that this perceived risk is less relevant nowadays—digital underwriting models are far more effective at assessing risk than a shopfront loan officer. – Oliver Sabga, Term Finance
4. You should look for lenders who have signed the Small Business Borrowers’ Bill of Rights.
There is a broad spectrum of online lenders, many of whom use deception to prey on small businesses. However, there also are responsible online lenders. The small loan sizes, ease and reach offered by fintech lenders can benefit owners not well served by banks. Review the terms of any financing offer, read the Small Business Borrowers’ Bill of Rights and consider using lenders that have signed it. – Jacob Haar, Community Investment Management LLC
5. You should focus on structure and lender reputation.
Online lending is a great option for finding capital but requires adequate diligence by the borrower. Focus on structure and lender reputation when seeking financing online. Online lenders include reputable lenders that offer reasonable capital but also include predatory high-interest loans. Make sure you understand the loan structure and do your diligence in researching the lender. – George Souri, LQD Business Finance
6. Rates may rise as you get closer to signing.
Do not pay fees for lenders to “match” you with the perfect underwriter. Be aware that rates and fees often double or even triple the closer you get to signing the docs. Have other options, and never work with one lender. Search out many options and do your research before you give them your personal information. – Matt Scott, 7xCapital.com
7. It’s wise to conduct reference checks.
There are different types of online lenders offering various types, terms and conditions. You should identify your unique needs first and find out which type of loan/lender suits you the most. Once you find a few candidates, make sure to do a reference check on them. Talk to a company that has gotten a loan from them. In that way, you can easily filter out bad lenders. – Kristy Kim, TomoCredit
8. You may not be able to communicate with the lender when you need to.
In today’s world, we tend to gravitate to all-online processes with people we’ve never personally met. This undervalues the relationships at the heart of lending. You might not be able to communicate with them whenever you need to—a hallmark of good lender relationships. With online lending, you’re at risk of getting drawn in by a rate that isn’t guaranteed and not knowing that until later. – Bill Keen, Keen Wealth Advisors
9. Online lending services aren’t strongly regulated.
The small-business online lending space is dangerously under-regulated. What looks like fast cash is often dangerous, trapping business owners with exorbitant interest rates and hidden fees. To protect themselves, small-business owners should carefully read and understand the rates and terms of the loan and consider lenders that have signed the Small Business Borrowers’ Bill of Rights. – Luz Urrutia, Opportunity Fund
10. Your information may be sold to other lenders.
My biggest concern about online lending is there are too many scams and frauds. Your information is typically sold to other lenders, so you might find yourself getting multiple e-mails and phone calls after you opt in. Do a lot of research before making a decision. I prefer the old-fashioned way through a real institution (if you really have to). Be careful with the websites! – Gabriela Berrospi, Latino Wall Street
11. They may be disguising alternative financing instruments as loans.
These days the online lending industry is like the Wild West, with lenders disguising alternative financing instruments as business loans. Understanding the difference between credit lines, term loans and merchant cash advances can save you time and money. Keep a close eye on the fees that are associated with each product and make sure you know the term or duration of the funding instrument. – Matthew Meehan, Shield Advisory Group