Insights into the world of small business lending and development
Not All Online Lenders Are Created Equal
7 Signs That You Shouldn’t Sign (or E-sign) on the Dotted Line
As a small business owner, you are probably used to doing just about everything online - from invoicing and paying bills to marketing and ordering inventory. So it might seem natural to look for a small business loan online too. And with platforms like Accion, SimpleGrowth and NYC Local Lending, there are some great options online.
However, many online lenders target small business owners who have less than perfect credit and/or were denied traditional bank loans. The quick application process and lax criteria can seem appealing at first, until business owners are locked into loans with outrageous interest rates, fees and prepayment penalties.
Online lenders often fall outside the regulations that apply to traditional banks, which means that you don’t have the legal protection you would expect. Their financing offers can seem similar to traditional business loans or lines of credit, until you take a closer look at the terms and conditions.
So, how do you know if an online lender is a safe bet or a risky option? Here are seven red flags to look for before clicking submit:
1. Unclear pricing and terms
Predatory lenders often use unusual terms or formats that help disguise the true interest rates and fees. You are entitled to see (and understand) what fees to expect, what interest rate you’ll be charged, whether there will be any balloon payments or penalties for early repayment, what the repayment terms are, and what happens if a payment is late.
2. Pressure to make a decision
You should have a reasonable amount of time to consider the loan offer and to explore all your options. If a lender requires a response within hours, it’s usually because they don’t want to give you too much time to understand their terms and fees.
3. Outrageous prepayment penalties
Lenders make their money from the interest on your loan. So it’s normal that they would charge a fee to discourage early payoff. However, you should be wary of any lender that demands a huge prepayment penalty.
4. New credit offers for a larger loan
Whether a lender agrees to an early payoff in exchange for a new, larger loan or extends new credit when you are not even current on your existing loan, they are likely trying to trap you in the revolving door of debt.
5. Double dipping
If you are refinancing or modifying a loan with a fixed fee as the primary financing charge, the lender should not charge fees on the outstanding principal.
6. Unconventional payment terms
You need to know how much you’ll be paying each month or every few weeks, so look out for payment schedules that vary from day to day or month to month. If payments are to be debited daily, weekly or as a percentage of sales, you may find yourself in a situation where you never know when a lender is going to withdraw money from your account.
7. It seems too good to be true
In the words of small business owner Andrew Li, “if an offer for money seems too good to be true, it’s probably too good to be true.” Responsible lenders do not promise fast cash with little or no documentation. Even microlenders, who specialize in smaller loans for entrepreneurs and small businesses, require you to follow a thorough application process. If a lender approves your application without the proper due diligence, they probably intend on making their money through high rates and fees.
Regardless of the amount, a small business loan isn’t something to rush into. Read reviews of the lender and research any complaints that have been filed against them. Also, we recommend checking to see if the lender has signed the small business Borrowers’ Bill of Rights, which advocates for transparency, fairness, and putting the rights of borrowers at the center of the lending process.