As a small business owner, it’s not news to you that companies need capital to get started, to buy essential equipment and inventory, to grow and if everything goes according to plan, prosper. And it shouldn’t be a surprise to you that sources of capital can sometimes be hard to come by for small businesses.
But what you may not know is that an increasingly popular new source of small business funding – online loans – might not be the boon cash-starved entrepreneurs had hoped would be their salvation.
The Internet has certainly been a boon for small business owners, especially smaller ones. It has often enabled the startups to effectively compete with the giants of commerce in terms of creating a market presence. It has also helped small businesses establish cost-effective ways to do business with their customers and to eliminate the expense of a big sales force, brick and mortar stores or offices. Over the past several years, a new phenomenon has been sweeping the Web that promises small businesses greater access to much-needed capital through online loans.
Small business entrepreneurs once had a limited choice on raising capital to start a company, to keep one going or to help it grow. They could tap into their own savings, ask friends or family for money, fill out an application with the Small Business Administration (SBA), or walk into a neighborhood bank and seek a loan.
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Some of these methods are easier than others. The easiest, of course, is tapping into personal savings. However, how many people have sufficient savings to keep loaning their businesses money? Asking friends or family for funds can be problematic. A federal loan means you have to deal with a slow government bureaucracy. Going to the bank entails proving your business plan and your credit worthiness, and banks are becoming more risk averse, meaning they’re loaning less and less to small businesses.
Enter the online loan industry. Now you can fill out a form on a website and if approved, quickly get much-needed cash for your business. Sounds great, doesn’t it? Perhaps it may even sound too good to be true? And we’ve all heard the old adage that famously says, “If it sounds too good to be true, it probably is.”
Is that the case when it comes to online small business loans? That depends. How fast do you need the money, what price are you willing to pay for it and are you willing to place yourself at risk?
Taking out an online loan is often much easier than applying for a loan from the SBA or a bank. There are fewer forms, fewer questions and less documentation. The sites are typically written in easy-to-understand language and can be quickly navigated by anyone. So that may be a competitive plus when compared to the SBA or most banks, but at what cost?
There are potential pitfalls small business owners need to keep in mind should they decide to pursue an online loan.
For one, fees and interest rates generally tend to be much higher for online loans than for traditional loans from a bank. There are often more fees attached to the online loan than loans from other sources.
“Caveat emptor” – let the buyer beware. The internet is swamped with alternative lenders using gimmicks to gain attention. One such gimmick is to express the interest rate in terms of simple interest as opposed to APR (annual percentage rate) – a more realistic measure of the cost of funds. Expressing the interest rate as “simple” rather than as APR can be confusing, even misleading, because the actual interest rate can be much more expensive than it appears.
Repayment terms are another important item to consider. Many online loans have set repayment provisions, and these provisions could wind up making the loan more of a hindrance down the road than a help. If you are expecting a traditional once-a-month payment plan, for example, you may be surprised to learn the online lender you’ve taken a loan from actually requires payment every week, or in the worst cases, even daily. Can your cash flow handle these strict requirements?
Finally, there is the security issue. News reports come out almost daily about online scams of all kinds. Just because someone has put up a website advertising online loans does not automatically mean it’s a legitimate firm. There’s the possibility it’s a fly-by-night outfit looking to steal your information and good name for their own nefarious uses or a lead gather who will then sell it to online lenders.
If you are going to use an online lender to obtain a small business loan, here are a few ideas on how to protect your company and find a safe lender. First, make sure the lender has a real physical address. If the site does not provide one, run away. If the site does give an address, use tools like Google Street View to confirm it is an actual location and not an empty field. Next, search for third-party verification from such sources as the Better Business Bureau and other ratings services. One additional tip is to find out who owns the website, how long they’ve been around and if they are actually an online lender. You can do this using WHOIS.
It’s always best to do strict due diligence on the lender and read all the fine print before taking out any loan, be it online or through a traditional source. Not doing so could put your small business at risk. Yes, small business loans are increasingly harder to come by through traditional lending sources and businesses need capital, sometimes quite quick capital. But by investing a little time, you can save yourself and your businesses from tripping over avoidable pitfalls.