Business owners looking for an infusion of cash may look to online lending rather than 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 financing option, it is essential to know the facts about online lending before you get started.
Below, Forbes Finance Council members give 15 tips for business owners looking to explore online lending options. They explain what to look for in a lender and what you should pay attention to before you sign any virtual papers.
1. Read the terms and conditions
Entrepreneurs should thoroughly research the lender’s offer to ensure that the product and the terms and conditions associated with it match their financial situation. They should also review the testimonials of the company’s clients, look to see if there are any hidden costs or unusually high interest rates, and determine if the lender is providing recourse/unscheduled financing or additional/non-collateral financing before entering into an agreement. – Pushkar Mukwar, 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 search and match with the right commercial lender for your business is very powerful and is a tool that business owners don’t use enough. The one thing you need to consider when using online resources to find a lending solution is to ensure that the organization is reputable, transparent, and experienced. Matthew Bionrod, Cerebro Capital
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3. Understand the time difference
Most business owners know how to take advantage of cash infusion, but when applying through traditional lenders, they plan 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 funds faster as he fulfills his vision faster than expected. – Bernardo Martinez, PayPal
4. Find April
If it sounds too good to be true, it probably is. Small business owners who are considering getting loans online should look up the annual interest rate (APR). Entrepreneurs must understand all costs, rates, and terms associated with the loan before signing any documents. Too often, unscrupulous lenders hide exorbitant fees behind promises of quick cash and postage numbers that look like interest rates but aren’t. Reputable lenders having APRs. – Carolina Martinez, CAMEO
5. Review the fine print carefully
Online lending can be fast and convenient. And who doesn't like that? But what interest rates will you agree to pay if you follow the online loan path? You'd better be prepared to give the finer details a very serious review if you want to avoid some shockingly high prices and harsh penalties if you fall behind. - Khaled Parikh, Bank FAIR
6. Know the interest rates
Online lenders lend money if they can make use of it. They will also expect interest payments, which can accrue quickly. In extreme cases, the interest rate can reach well over 100% APR. Before applying for a loan online, do your research. Never borrow money without knowing interest rates and annual percentage fees. - Neil Anders, Trusted Rate, Inc.
7. Ask about industry experience
Organizations seeking to lend online 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 would prefer to avoid. Asking this question up front avoids wasting valuable time searching for a loan from a company that may not be willing to work with you, no matter how quickly you can pay it off. - Jeffrey Bartle, The Hamptons Group, LLC
8. Get your books in the cloud
Make sure your books are in the cloud and are up to date. Many online lenders offer cash flow-based accelerated loans with direct access to cloud accounting data for quick assessments, rather than requiring you to submit documents manually. Having your books in the cloud will ensure that you are ready to provide online lenders with access to your financial data for a faster response time. - Nick Chandy, ForwardAI
9. Check reviews and credentials
Online lending has a lot of benefits for business owners. Borrower beware, however: Not all online lenders are created equal, and many charge exorbitant interest rates and other fees. Check out their reviews and see if they are a signatory to the Small Business Borrower Rights Act. Samir Gulati, Zain Business
10. Understand the cost of capital
Make sure you have a solid understanding of the cost of capital. Most of the non-bank lenders you will find online will tell you that they can save you money quickly; However, they also tend to be expensive. Avoid taking on expensive debt to meet short-term liquidity needs, as this can lead to long-term suffering. - Sean Frank, Cloud Equity Group
11. Talk to your bank first
Choosing to lend online versus traditional lending platforms can crush your money management. The APR of some lenders in this space ranges from 29.9% all the way up 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 payments and understand the risks. Informed decision making equals success. - Cynthia Hemingway Fourlane, Inc.
12. Be prepared to reduce consumer protection
Not many online lenders offer you the customer protection that banks offer. The trade-off is that you can probably get more and faster money from an online lender - given at a higher rate (interest and fees) than the bank rate. The difference is that when times get tough, these lenders are more likely to call back your debts sooner 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're signing for and who's responsible for paying if things don't go as planned. Most online lenders charge high interest rates and require personal guarantees that pass on the liability in the event of failure to you, not your business. If you've been resorting to short-term, high-interest lending options to keep your business running, it might be time to rethink your business strategy. - Joseph Orsino, Tiltify
14. Review different online lending options
Conventional business lending is mainly based on business and credit history. It may also take some time to go the traditional route. Online business lending will always be the fastest route. Some companies specialize in loans for bad credit, but the rates can be very high. Some lending programs use merit-based underwriting that is not highly dependent on personal credit scores. - Jared Weitz, United Capital Source Inc.
15. Consider trade-offs
While online lending may be the quickest and easiest approach, there are trade-offs to consider. Online lenders usually charge higher fees and have higher interest rates. By securing your capital online, you are missing out on an opportunity to enhance your banking business relationship. Stronger commercial banking relationships usually lead to greater access to capital in the long run. - Robert Reader, GlassView