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Mar 07, 2020

Should You Trust Online Lenders?

Within a few years, online lending has become a massive financial industry that is rapidly changing how small business owners seek out funding. Obviously, most small business owners want to be careful in regards to taking out loans, so there can be some unease about this new universe. Armed with some knowledge, you can see how these products can work for you. You might find online lenders to be faster and easier than anything you’ve experienced before.  

Common Misconceptions About Online Lenders

Like everything involving the internet, there are some wild misconceptions flying around about how online lenders operate. And while there are undoubtedly more than a few unscrupulous actors out on the World Wide Web, there’s no reason why savvy small business owners shouldn’t take advantage of the range of lending products available online. Just be prepared to read and compare, and be careful with where you type in your information.  

They’re All Predators

In the long aftermath of the 2008 financial crisis, many Americans lost trust in lending institutions—and understandably so. While predatory lending is still an issue around the country, many aboveboard lenders operate online that have offerings for small businesses. However, you should always do your due diligence: read the terms of any loans closely, and don’t be shy with questions. Some red flags include prepayment penalties and hard-to-understand repayment structures. Also look out for offers that seem too easy—in general, if it seems too good to be true, it very well might be.

Your Data Will Be Sold

Quality online lenders are very stringent on how they handle your data. Before inputting sensitive information, read over the terms and conditions. Good lenders need your information to see what you qualify for, not for selling to the highest bidder. In general, look for lenders that have physical locations as well as an online presence—or at least a mailing address you can locate. Be careful when putting your information into lending platforms as well. Some, like Lendio, use your data just to find loans that suit your needs, while others might be looking to sell your contact information. Research the intent of any lending platform you use.

Your Credit Score Will Suffer

Most online lenders only do a so-called “soft pull” on your credit report to see if you qualify. Such an action won’t hurt your score. Although taking out new lines of credit can dampen your score a bit at first, growing your credit-to-debt ratio and repaying a loan on time will actually improve your credit score over time.

Only Those Rejected By Banks Apply for Online Loans

There’s a whole world of reasons why a small business would apply for alternative loans instead of traditional term loans from a bank. In most cases, businesses applying for term loans have been operating for years and are seeking at least $100,000 or more. Additionally, the repayment period can last decades. Not to mention, the application process is purposefully onerous. If any of those qualifications seem less than ideal for your company’s needs, you are one of the many small business owners who should look into online loans.

Online Lenders Are Unregulated

While there is less regulation overall for the wide span of online and alternative lenders, it isn’t the Wild West—if you’re smart. Some ways to ensure that there is some sort of oversight over your lending options is to utilize a quality lending platform, like Lendio, and use products that are connected to a known bank or credit company. If you are deeply concerned about regulations, you can apply online for loan products that are partly backed by the Small Business Administration, known as SBA Loans.

Some Realities to Consider

Online lenders operate differently than physical banks, so you should be prepared for new situations. Here are some aspects of the online lending process that you may encounter.

Higher Rates Are Common

The reason why traditional term loans from a bank are so sought after by some small business owners is that banks generally provide the best interest rates. However, the application process is arduous, the repayment period is extremely long, and the minimum loan amounts are usually pretty high. Because online lenders make decisions quicker and often for smaller amounts of money, the interest rates are typically higher. Still, if the online lender is trustworthy, the rates won’t be astronomically different. When making decisions, keep a close eye on interest rates and calculate the total you would end up spending after the loan is repaid.

Loans Are Structured Differently

Online lenders typically offer wildly different structures than a traditional term loan, but this might be a benefit in some cases. Some loans, like ACH cash flow loans, are based on your daily sales, while others, like equipment financing, lend you money so you can buy needed machinery. Identify your business needs and then research lending products that would help you reach those needs.

You’ll Have to Upload Documents

Because you are applying online, you will likely have to upload sensitive documents about you and your business. If this makes you queasy, research how the data is used and ask questions. Quality lenders will be very up-front about how this information is used.  

Phone Time Instead of Face Time

You will likely never meet your online lender face-to-face. Your communication will be done via email, online messaging, and telephone. With automated chatbots becoming increasingly common, don’t be afraid to confirm that you are speaking with a real person through a website. And if you feel less than comfortable, pick up the phone. If the lender is trusty, service representatives will be ready and willing to answer any questions. In fact, if it’s hard to get answers by calling a lender, this is likely a red flag that the offer is too good to be true.

The Benefits of Online Lending

There’s a reason why small business owners are going online to find loans—the cash gets into your account fast, and you can compare dozens of options with a few keystrokes. If you do your research, online lending can be an efficient way to get needed funding fast.

Much Faster Application Process

Online lenders are looking to provide you with a loan as fast as they can because they know fast cash is why many small business owners are turning online in the first place. The application and approval period is generally within a few days to a week or two. Since most applications are available online, you can fill out the forms anytime, day or night, and it will likely be reviewed within 24 hours. Because the loan amounts are usually lower than what a bank offers, the application process online is significantly faster.  

Get Loans Quicker

While approval isn’t guaranteed, the bar is much lower than you will find with a term loan. If your credit report is good-to-excellent, the chances are high that you’ll receive approval and then your loan very quickly. This is why online loans are often ideal if you need a quick infusion of funding to get through a sudden, unexpected cash crunch. Still, remember to check the interest rates and repayment terms alongside the turnaround time.  

Huge Variety of Loan Products

Online lenders are constantly devising new loan products to suit the diverse needs of American small businesses. Some loans don’t even require a credit check, and others are based around a specific need, like equipment financing. Also, don’t turn your nose up at business credit cards—they might be an ideal solution if your funding needs are relatively small. Look at your business plan and think about what lending products can benefit you the most.  

Find A Loan Structure That Works for You

Because the range of loan products is so diffuse, the structures are very different as well. For term loans, you will be repaying a very large loan back to a bank over a very long time—maybe 20 to 30 years. For some online loans, the term can be as short as 6 months. Some products take automated daily repayments from your bank account. Many business credit cards offer an introductory period of 12 to 15 months where the interest rate is 0%, but there might be an introductory or annual fee. This variation is why you need to compare and contrast what online loans will help you reach your business goals the best.

Comparing Your Options Has Never Been Easier

Unlike the pre-internet days, you can compare the terms of hundreds of loans in a matter of minutes. On platforms like Lendio, you can look at a wide range of lending options, including business credit cards, and sort them by categories like interest rates and maximum loan amounts. By submitting one application, you can see offers from a lengthy list of lenders.

About the author

Barry Eitel
Barry Eitel
Barry Eitel has written about business and technology for eight years, including working as a staff writer for Intuit's Small Business Center and as the Business Editor for the Piedmont Post, a weekly newspaper covering the city of Piedmont, California.

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