Risky options for Main Street cash, credit as banks say no on loans
Small businesses may be tempted by the ease and speed of online loans and cash advances, but it’s important to do your research before committing to any financing options. While these platforms can provide much-needed funds for businesses that have struggled to get traditional bank loans, there are risks to consider, such as higher interest rates, fees, and personal guarantees. Moreover, the alternative lending industry has faced scrutiny due to a lack of regulation, leaving businesses vulnerable to unscrupulous lenders. Here’s what small businesses need to know before considering online financing:
1. What are online loans?
An online loan can be used to fund various business expenses and is generally easier to apply and qualify for than a traditional bank loan. The loan amount can vary from $100,000 to $500,000, and terms are based on the owner’s credit profile, how long the business has been operating, its financials, and the amount borrowed. However, online loans generally carry higher interest rates than traditional bank loans, with APRs often ranging from 6% to 99%. Businesses need to pay attention to fees that could make the loan more costly, such as application fees, good-standing fees, and credit check fees.
2. What is a merchant cash advance?
A merchant cash advance allows businesses to borrow money against their future sales and pay it back as these sales are generated, often over three to 18 months. This type of financing is particularly attractive when a small business needs cash fast, generally within a few days, but it can be quite costly, with fees charged as a factor rate, which can be expressed in triple-digit APRs.
3. What should I consider when choosing between fixed and variable rate debt?
Businesses need to consider whether the rate is fixed or variable, the duration, their ability to pay it back on time, and costs, including underwriting and late fees, if any. Personal or business guarantees may be required, and businesses need to consider what happens if a payment is missed. It’s essential to carefully read the terms and conditions and understand what you’re signing up for before agreeing to financing.
4. How can I find a reputable business loan provider?
It’s crucial to research potential providers by checking online customer reviews, browsing for regulatory actions against the funding company, and consulting with financial professionals such as CPAs and attorneys. Consider contacting the Small Business Finance Association, an industry organization whose members are mostly online lenders and funders. Members of the SBFA who follow best practices related to pricing and term transparency, access to customer service, and fair collection are certified professionals. Other alternative financing options to consider include family and friends, investor equity, or credit cards.
5. How can I avoid getting further into debt?
Businesses need to think about what they can do to prop up their business without relying on third-party funding, such as getting customers to prepay in exchange for a discount or negotiating longer payment terms from vendors. Reducing costs is another way to avoid over-reliance on financing options.
Main Street Cash and Credit: Exploring Risky Options as Banks Deny Loans.
Small businesses are increasingly being targeted with online loans and cash advances, but some of these offers could lead companies further into debt, reports CNBC. Online lending platforms make it easier for small businesses to obtain financing, however finding a reputable provider with reasonable costs and terms that won’t undermine long-term prospects can be a challenge. Some types of loans carry higher interest rates than those available from traditional banks while merchant cash advance options can also be more costly. To counter this, California and New York are seeking to introduce mandatory cost disclosures for small loans.