August 8, 2018
By Bob Coleman
Editor, C-Suite Wednesday
C-Suite Wednesday — 10 Questions to Ask Before Clicking Accept of an Online Loan
CDC Small Business Finance has published an excellent e-book instructing Main Street on some of the perils of online business lending.
The publication correctly identifies the advantage of immediate funding is too often outweighed by the cost.
Here are the ten questions a borrower should answer before clicking on the accept button.
1) Why Do You Need Financing?
If you are looking to finance expansion, a capital equipment purchase, or finance inventory, then long-term traditional financing might make more sense. You can carry the debt for an extended period and expense the loan costs over time.
If you are in need of emergency funds, then quick financing, such as a merchant loan, may be the right path, where you can generally obtain a loan in only a few days.
2) How Quickly Do You Need Funding?
How soon you need financing will determine what type of loan you should pursue. Keep in mind that certain types of “hard money” loans can carry interest rates above 125%.
Consider how urgently you need the money and only “quick” finance the amount you need right now. Seek out longer-term financing for anything outside of immediate needs.
3) How Much Do You Need?
Estimating the right loan amount means not paying extra for the money you don’t need, yet ensuring you get enough cash to meet all of your demands.
Be aware that some lenders will try to “upsell” a business owner into borrowing more money than they need.
How Are Your Receivables?
If you can establish a consistent monthly cash-flow, through daily or weekly sales, and you need quick money, your access to merchant financing is a foregone conclusion.
However, if you are making monthly sales and your cash-flow is inconsistent, you are better off obtaining more traditional funding that won’t require daily withdrawals from your bank account.
4) How is Your Credit?
Small businesses often turn to merchant lenders because of credit problems. A poor credit history limits your options and can increase the cost of many loan products.
Your credit score doesn’t have to be perfect to get a loan, but a higher score will increase your access to various types of financing and provide you confidence in knowing you can get the loan you want when you need it.
5) Can You Obtain a Bank Loan?
Some community banks and regional SBA lenders can assist businesses with their capital needs, regardless of your credit history.
Even if you have been turned down by a national bank, many online lenders will engage with you and offer similar loan products to that of the major banks.
6) What to Ask Your Online Lender
There are also some crucial questions you need to ask your online lender. Here are some of the more critical issues to address:
7) Are You a Direct Lender?
Some lenders will represent themselves as a “lender” but in fact, are brokering your loan and are not the entity issuing the credit.
However, dealing with a broker is not always a bad thing, especially for “creative” financing that meets specific needs.
8) What is My APR?
With a merchant loan, your cost may be called a “factor rate” or “buy rate,” and it’s not always black and white what you’ll end up paying.
Correctly calculating the APR allows you to determine the true cost of the funds that you are borrowing.
9) Is the Financing Amortized?
The benefit of an amortized loan is that you will have a clear indication of precisely what you are paying in interest and principle, and when the loan will be paid off.
A non-amortized loan may only charge you interest payments during a set time frame, leaving you responsible for paying off the principal balance at the end of the term.
10) Does the Loan Have a Prepayment Penalty?
Some loans indicate they do not charge a prepayment penalty but will have a clause that ensures they capture the entire amount of the buy rate before the loan is satisfied.
Other lenders will place a prepayment penalty in the loan as a way of preventing you from shopping around for “take-out” financing at a less expensive rate.