Remember when people were falling all over themselves to obtain millions of dollars from the mythical Nigerian prince?
Today it is easy to snicker at their credulity, but in the quest for business capital, many of us forget the old saw that if something seems too good to be true, it usually is.
The 2008 Great Recession spawned a wave of bank regulations that effectively turned off the spigot for conventional small business lending while leaving the alternative lending universe almost completely unregulated. In the succeeding years, the explosion of the internet and the development of new technology has created the fintech lending industry – a wild west environment that still has virtually no government oversight.
Many of these alternative lenders are legitimate businesses, and some are affiliated with traditional banks. Others will offer you the moon and then surprise you with ballooning interest rates and daily repayments coming directly from your bank account.
When expenses are soaring and money is tight, it is tempting to go online and apply for a quick loan. But before you click that “apply” link, check for these red flags:
The loan offer arrived unsolicited in the mail or email
Reputable lenders don’t flood your mailbox or inbox with incredible loan offers. They don’t use robocalls either, in case you were wondering.
The application is too easy
Online lenders may not use a FICO score, but legitimate companies have proprietary algorithms to rate creditworthiness. You should still need to provide business information for the lender to evaluate, and even the speediest online lenders require a day or more to make an evaluation. If the lender does not ask for your financials, doesn’t care about your credit rating and offers an instant loan, it’s time to log off.
The loan offered is much more than you need
While having extra cash may sound like a way to take the financial pressure off, it actually has the opposite effect. It guarantees a predatory lender will set your payments are higher than you can afford and keep you on the hook for years to repay the loan. Just say no.
You need a translator to understand the rates and fees
Ask for a breakdown in writing so you know exactly what you’re paying for and how much of a loan you’re agreeing to. Make sure it is written in plain English and you understand all the terms. Is the quoted interest rate an APR (Annual Percentage Rate) or a monthly or daily rate that can soar as high as 400% annually? Insist on seeing all the fees and charges and the terms of repayment. If they won’t provide this information, don’t take the money. Ditto if the loan penalizes you for prepayment.
So, if we’re living in the Wild West, how do we separate the reputable companies in the white hats from the predators?
Talk to your banker
Even if your bank has turned down your loan application, your banker may suggest a legitimate alternative lender and, based on your financials, recommend a loan amount that is appropriate for your business and won’t be too high to repay. The bank still wants your business, and your banker’s advice can be invaluable.
You wouldn’t buy a cell phone without performing a Google search and reading reviews. Why would you take an even larger risk with a business loan? Check the online reviews of any loan company you are considering. Websites like bankrate.com compare different lenders to help you find the best one for your particular business. If the online lender you are considering is not listed, chalk up another red flag.
The Responsible Business Lending Coalition has compiled a Bill of Rights for small business borrowers that itemizes the transparency that lenders should provide. The Bill of Rights is a must read for any small business before applying for a loan – online or not. The website lists the lenders who have agreed to abide by the Bill of Rights. While some reputable lenders have NOT signed on, this is still a good place to find a lender that will be upfront about its lending terms.