The Downside of Online Lenders & Predatory Lending
Judy Jandro, Senior Vice President of Small Business Lending
Big businesses may be the ones that make headlines, but economists say small businesses – companies with fewer than 500 employees – and start-ups drive the U.S. economy by providing jobs for over half of the country’s private workforce.
According to the most recent numbers available from the U.S. Small Business Administration (SBA), nearly half (47.8 percent) of workers in the U.S. are employed by nearly 30 million small businesses in the United States. These businesses have a big impact on the U.S. economy through job creation and innovation.
Of course, starting and operating a small business takes money and how you finance your business can make a very big difference. Business owners in communities with economic challenges do not always have the access to capital needed to either start or expand their businesses.
Online lenders have filled a funding gap in recent years by offering lower loan amounts, faster processing times and relaxed eligibility criteria and accounted to more than $6 billion in small business loans in 2017. According to the Federal Reserve, 24 percent of U.S. small businesses applied for credit online in 2017, up from 21 percent in 2016.
While annual percentage rates (APRs) may be high, a loan from an online lender can seem to be a convenient solution for small business owners who have struggled to get funding. But business owners need to go in with their eyes wide open. If you decide to get a loan from an alternative lender, you should do the same due diligence that you would with a bank loan – know the total cost and terms of the loan as well as any additional fees or penalties you could incur.
You’ve probably heard the saying, “If something sounds too good to be true, it usually is.” This is a good phrase to keep in mind when it comes to online lenders.
A better option is Community Reinvestment Fund, USA (CRF), one of the three nonprofit small business lending companies authorized by the SBA to provide SBA 7(a) small business loans. These loans – in amounts ranging from $150,000 to $4 million – can be used for commercial real estate, business acquisition, equipment, working capital, debt refinancing and more.
If the SBA 7(a) loan isn’t a fit for you or if you’re looking for less than $150,000 in lending, check out Connect2Capital, a first of its kind network of exclusively mission-driven lenders that provide financing to entrepreneurs. Complete a quick questionnaire on the website and get matched with a mission-driven lender that’s right for you.
If you’ve decided that applying for a small business loan is the right decision for your company, do your homework so you can recognize a good versus bad loan to avoid putting you and your business at risk. Taking on financing always involves some risk, but the process should never make you feel unsafe. Be on the lookout for these warning signs when applying for a loan:
- The interest rate seems unrealistically high. Online lenders are known to require higher interest rates, especially when compared to traditional loans.
- The small business loan officer doesn’t give you all the information.
- The small business loan application was much too easy to complete and required no documentation.
- The pricing and terms are unclear or not explained very well.
- The loan officer is aggressive.
- There’s no physical address or a very scant website.
- The loan has exorbitant prepayment penalties.
A legitimate lender will never, ask for money upfront and will always have a physical address – not just a P.O. box. Even online lenders will include their address in their contact information.
You’re putting a lot on the line by taking out financing to fund your company – make sure you’re working with reputable lenders who don’t engage in the practices that could break your business. Work with an organization with the historic credibility and commitment to empower people, eliminate barriers to economic mobility and build community wealth.