Positives and Pitfalls of Online Lending
Small Business Majority
Are you thinking about using an online lender to finance your small businesses? If so, there are a few things you should know before you get started.
A new breed of online lenders is transforming the lending space and providing new financing options for small businesses. These lenders offer new benefits, such as speed, ease-of-use and convenience. Upon filling out an online application, small business borrowers can be approved in minutes and have the money in their account in just days, whereas in the traditional banking model borrowers may not be approved for several weeks to even months.
Here are 4 different types of online lenders:
- Online marketplace lenders act as a marketplace by connecting borrowers with institutional and individual investors, which is a form of crowdfunding. An online marketplace loan is similar to a bank loan, as they have fixed, multi-year loan terms and APRs; they’re often referred to as term loans.
- Another option is an online cash flow lender, which is focused short-term working capital. For this type of financing, lenders provide funding and use your future cash flow as collateral for the loan.
- The next option is merchant cash advances. Merchant cash advance providers have been around for decades, and work by deducting a portion of every purchase made through your credit card payment processor. These can be among the most expensive loans you can take, and should be a last resort.
- Lastly, there’s crowdfunding. Crowdfunding is a new and evolving fundraising alternative that marries social media and finance. With crowdfunding, entrepreneurs reach out to the “crowd”—typically their friends, customers, supporters and social network—for funding. The idea is that lots of smaller sums of money can take the place of one or two large investors or lenders. The most successful campaigns inspire people to donate. Crowdfunding has added benefits beyond financing, such as marketing and customer engagement.
For many small businesses, going online for business solutions is becoming the norm. However, we highly recommend business owners proceed with caution when considering online financing. While there are responsible lenders in the space, there are others whose obscure terms can mask extremely high rates—the business version of payday lending. The problem is it can be hard to tell them apart, but we can help!
This work is supported by the Sam's Club Giving Program.