8 Lessons Learned:
How to Choose an Online Business Financing Provider
Business owners approach online financing providers for a variety of reasons, but often because they want a faster and easier transaction. Indeed, an online application can usually be completed in under an hour, with soaring approval rates and funds forwarded to the borrower’s account in less than a week. These are clearly advantages that traditional borrowing just doesn’t offer.
If you’re looking for an online business financing provider, keep the following in mind before you make a choice:
Before you take any step, determine your needs. Are you looking to cover bills or secure short-term funding for inventory? In such a case, 12 to 24-months loan may be a huge help. If your goal is to purchase equipment and other longer-term assets, a loan with a minimum term of three is usually preferable.
Let’s face it: predatory lending practices continue to this day, especially online. Therefore, always take time to screen your prospective providers before taking any money from them. Choose a company that will offer loan terms up front and has a physical address and landline phone number, as well as website security disclosures on their web pages.
The only dependable method of comparing loans is to compare APRs (the total amount you’ll repay, including interest rates and other fees) and repayment terms. Take note that merchant cash advances come with the highest APRs, with payments generally done on a weekly or daily basis. In most cases, online financing terms have higher APRs than conventional bank financing (although considerable less compared to merchant cash advances), with repayments done monthly or weekly. Another factor to consider is whether or not there will be a prepayment penalty.
For cheaper financing and better terms, providers may provide debt service coverage ratio (DSCR), which is an assessment of how likely your business flow will be able to pay for the loan. With a strong personal credit score, you can be a good candidate for a small-business loan, for which you’d like to check your business inventory or property that you can use as collateral.
Pick an online financing company that provides extra services like technical advice and long-term financing and development assistance. These additional services can be particularly helpful for businesses at a growth point.
Online small business financing came out of the 2008 financial crisis stronger as banks reduced small-business lending. Nowadays, online financiers compose above 20 percent of all small-business loan applications as per a small business credit survey conducted by Joint Federal Reserve Banks.
As opposed to conventional financing that requires a personal meeting with a banker or lender, online finances of course relies on technology. Decisions are made faster, and there are often more approvals than rejections.
However, since online financing providers assume more risk, their loans typically have higher interest rates and fees, as well as shorter repayment periods. Then again, this is perfectly understandable, and it is up to the borrow to make the system work for them as it has for countless others. At the end of the day, it can all be about finding the right online financing provider.