Online lending platforms use technology to disrupt traditional lending and have become a large component of the robust FinTech sector. Small business owners shopping for a loan now can skip their local bank (which might already have said "no") and secure funds through an online provider.
Sounds great, right? It can be. The key is to get the right amount of capital you need to grow your business -- at your lowest qualified price and in a reasonable period of time.
Beware: Not all online lenders are created equal. Be on the lookout for those who offer entrepreneurs solid financial options. Longer-term loan products with low interest rates combine for the smallest monthly payments and the lowest APR. If you get an expensive short-term loan instead, your small business dream quickly can turn into a financial nightmare. Here are a few guidelines to help you determine which online lender will be a financial fit.
1. Get your house in order.
Once you’ve made the decision to seek funding, get your business records in order before starting the process with any lender. This suggestion doesn’t pertain only to paperwork--though it's vital to make sure you're organized. Take a look at your cash flow and your business plan. How much money do you need to borrow? Which types of payments can you afford? Several free and low-cost resources exist to help you figure it all out. Check with your local SCORE office or Small Business Administration (SBA) Development Center for workshops or one-on-one mentoring.
2. Eliminate your bad debt.
If a high-priced lender is keeping you in a debt trap, get out of it! You can refinance expensive debt and trim thousands from your monthly budget by securing a long-term, low-rate loan like the one you should've taken in the first place. SBA loans typically have the lowest possible APRs. Online marketplaces that offer SBA loans exclusively can move faster than a traditional lender. They also can help match your own small business to the SBA-preferred lender that's right for you--all of which makes them an ideal place to get a fresh start. Learn more at SmartBiz, the company I founded to offer greater options to fellow entrepreneurs.
Related: SBA Loans For Your Start-up
3. Research your loan provider options.
Technology is your friend, so get ready to Google. It’s crucial for small business owners to perform due diligence. Exploring a lender's real substance means looking beyond flashy websites or promises of instant funding. You want a transparent lender that offers single-digit interest rates, long terms (ideally as long as 10 years), stellar customer service, and verified online security. Scour unbiased reviews on sites such as TrustPilot and Google+ or read features from reputable online publications. Two to try are NerdWallet and FitSmallBusiness. Then, ask your prospective loan provider to point you toward case studies or white papers that give you a good feel for the company and its customers.
4. Look out for teaser rates and “too-good-to-be-true” offers.
Legitimate companies offer real loans with reasonable terms and transparent terms. Many lenders will advertise a rate "as low as," though few borrowers actually will get it. Don't let yourself be lured into a bait-and-switch. When you need capital, it’s tempting to take an offer at face value. It's healthy to be a bit of skeptic. Assure you're getting what you expected, and don’t ignore the details. If you do, you could find the cost of your loan skyrocketing.
5. Determine the APR.
Unscrupulous lenders will disguise their terms with confusing or misleading pricing information. Instead of clearly presenting a true Annual Percentage Rate (APR), they might obscure their pricing as a general “rate," “factor rate,” or “cost.” According to the Responsible Business Lending Coalition, a borrower’s 15 percent “factor rate” actually could be equivalent to a 50 percent interest rate! The APR includes interest rate, fees, and loan term. Stay focused on that all-in-one figure so you effectively can compare different lending options. If a funder won't give you an APR when asked, be cautious.
6. Pay attention to fees and other costs.
If your provider gives only an interest rate and doesn't accurately disclose other fees, you won’t be able to calculate the APR and determine whether the loan is a good deal. Even worse, you might still be on the hook for origination fees, processing fees, application fees, and other costs. Make certain you know how much money will be deposited into your account after fees are paid, and follow up. Ask about prepayment penalties and read your loan documents carefully before you sign. Be aware that many cash-advance lenders will offer the option to refinance you advance before the end of the term. Don't fall for it. You'll end up with an early-payoff penalty on your first loan plus fees associated with your refinance. Together, these can drive your APR into triple digits.