Not too long ago there were only a few options when a small business (SMB) owner needed a loan. There were banks, savings and loans or credit unions. If you didn’t qualify for a traditional loan there was always your brother-in-law who knew a guy, who knew a guy. But, as gangster movies have taught us, that never goes well.
But, now with internet banking the choices have grown. There are hundreds, possibly thousands, of non-traditional lenders. They operate entirely online and are offering loans to SMBs who are considered too risky by traditional banks. They can be just what you need or ruin your company. Remember the lessons of the Great Recession?
It was fueled, in part, by the housing loan industry: greed, aggressive lending practices, bad underwriting, poor regulation, dishonesty and matching customers with unsuitable products. They put people into houses they couldn’t possibly afford with loans they didn’t understand.
There’s limited regulation of online SMB lending companies and many are following in the housing loan industry’s footsteps. The unscrupulous ones are giving money to owners who don’t understand the loan’s terms and will never be able to service the debt. It’s up to you, the borrower, to protect yourself by knowing what you’re getting into.
Look for companies who are transparent. The pricing and terms (i.e. one time charges, upfront costs, administrative and origination fees) should be easy to find and understand. The annual percentage rate (APR), which shows the loan’s true and total cost, should be prominent.
They should be willing to answer clearly (no jargon) and completely (go over it as many times as you need) any questions you have. They’ll provide, in writing on the website, full disclosure of all their products and services, and won’t try to steer you to ones that aren’t in your best interest. There should be no hard up-sell or dismissal of your concerns.
Many lenders use brokers and salespeople who earn commissions from making loans. There’s a growing problem with unscrupulous people giving SMB owners loans they have no hope of paying back – which usually results bankruptcy or re-borrowing. An honest, ethical salesperson will reveal their commission structure and the borrower’s cost.
Good business people take out bad loans. Most get one with the full intention of paying it back, but then are unable to do so. Ethical alternative lenders know the consequences of doing business with riskier customers and they work with responsible third-party debt collectors. Their disclosures should plainly spell out your rights to fair collection practices.
Nontraditional business loans are complex and hard to understand. It’s easy for someone to get confused and make a bad decision. It’s the responsibility of the SMB owner to make sure he has a fair lending experience. Don’t put yourself in a no-win situation because you didn’t take the time to do your due diligence.
