There is no arguing the fact that online lenders are evil. Their interest rates are high, their repayment terms are bad, and they have loopholes upon loopholes in their contracts to cheat you out of money. However, they are a necessary evil because sometimes they are the only kind of lender a business has access to. In fact, this is happening more often now because of the pandemic crisis and economic recession. Therefore, learning how to use online lenders with minimal risks is a must for business’ survival.
The Good and the Bad About Online Lenders
Businesses need funding and getting loans is often essential for their survival. It’s definitely like this in times of economic crisis. Small businesses, in particular, suffer greatly during those periods. A loan might often be the only thing that keeps them afloat.
It took ten years after the crisis of 2008 for small businesses to get back to the level of growth before the recession. And everything was going very well for them with new startups popping out and banks becoming more lenient in offering business loans. But now, with the coronavirus pandemic and recession it caused, lending has nearly stopped again.
So, banks don’t give money to businesses, and even government support programs have run out of funding by now. But businesses only need the loans more because of the difficult economic situation.
Enter online lenders, which still operate despite the circumstances.
On the good side, this means that many small companies get a chance to struggle through lockdowns. This might be enough to keep them running until they can recover. This keeps the jobs of small business employees and fuels the economy on different levels. From this point of view, online lenders are contributing to the recovery of the global economy.
However, this “help” comes at a steep price.
The cons of dealing with online lenders include:
- Very high interest rates.
Online business loans are often comparable to personal payday loans. This means that their interest rates are so high that taking on this debt for anything but a couple of weeks might bankrupt an average small business. - Bad repayment terms.
When you take a business loan from a bank, you can expect the repayment terms to be flexible and reasonable. However, with online loans, you’ll have a very strict schedule and it can’t be amended through negotiation. Moreover, if you miss any payments, you’ll have to pay extra and the interest rate might go up. Also, online loans often do not allow you to pay them off early. - Hidden fees and charges.
Many online lenders can’t be trusted. They might have different loopholes or hidden fees in the contract’s fine print. Therefore, you might end up in a very bad situation unless you are careful.
How to Minimize your Risks When Dealing with Online Lenders
Admittedly, those are some very serious cons. However, this doesn’t change the fact that when a business needs money, it might have no choice. If you are in this kind of position, you’ll need to do your best to find lenders that can be trusted. One of the best information sources available to you is online lender reviews. They contain detailed and unbiased information from professionals and clearly list both pros and cons of every option. Reviews from customers, those that are genuine, also offer some important info. From those you can learn how good customer service is and how the lender manages different issues that might pop up.
When studying online lending options for your business you should focus on the following:
- You always need to make sure that whatever lender you are dealing with is certified. It also must be authorized to offer business loans in particular. Be very thorough when studying all official documentation of the lender. If worse comes to worst, you must be confident that you can take them to court.
- Interest rates.
Average business loan interest rates from big banks range from 2.55% to 5.14%. But with alternative and online lenders they can get over 70%. There are some types of financing that go as high as 250%. Be sure to do your calculations carefully so you pick a lender that’s reasonable. However, don’t get your hopes up for finding someone to charge you less than 13%. - Repayment terms.
Repayment terms in online loans are usually very strict. You have a detailed schedule of when you must make payments. Usually, you’ll need to do this weekly or biweekly. Any delays will mean fines and many other problems. Therefore, first you need to decide if you can comply with the given schedule. - Fines and extra charges.
Are there fines for paying the loan off early? Can you even do that? Are there any extra charges you’ll need to pay? Study the contract’s terms and conditions to the letter, including the fine print. You need to be 100% sure you understand where every dollar of yours will go if you take out this loan.
Are Online Lenders Your Only Option?
Online lenders might be a necessary evil for many businesses. However, you also need to remember that they aren’t the only option you should try. It’s usually best to use an online loan as a short-term solution.
For example, you can use it to tide you over before a payment comes from a customer or when applying for a better loan. But in this case, you need to be sure that you will be able to pay off the loan early. Every day you wait adds more interest and loses more money for your business.
Don’t forget about applying for government support programs. They are widely available now to help small businesses through the recession in different ways.
In Conclusion: Online Lending Is a Necessary Evil
Online lending has many faults and risks. And you definitely shouldn’t use it unless it is the very last resort. However, the truth is that sometimes this is the only available option. In this case, you need to keep in mind all the risks of getting a loan with risky terms and exorbitant interest rates. Be sure you are prepared to pay it off before you get buried under this debt. And take your time researching lenders to find the most trustworthy ones.
What did we learn?
