Possible Risks of Taking an Online Loan on your Small Business

Possible Risks of Taking an Online Loan on your Small Business
Possible Risks of Taking an Online Loan on your Small Business
July 11, 2016

Small businesses have influx of cash as a perennial problem because of their constant need to grow or expand, to acquire new equipment. It would help them keep up with the growing competition in their sector or settling the domestic debts and sometimes taking care of the welfare of their staff.

Getting loan from bank is challenging

One traditional institution, everyone is tempted to run to when they are cash strapped, is the commercial banks. They know this, and as the number of people seeking for loans continues to grow, so will their terms continue to climb up to limit the amount of money they give out.

Read also: Merits and Demerits of Purchase Money and Non-purchase Money Loans in Short Sales

Small businesses may not qualify for bank loans for many reasons

Before the any commercial bank would agree to give out their money, they would often require a guarantee from you that they would get their money back. This guarantee is in the form of collateral. Many small business owners rarely have properties that can pass as collateral for the kind of money they need. In recent times, banks may require the financial records of the business as collateral. With huge financial turnover, one can get loans without collateral. Sadly, small businesses may not be able to pass this scale too.

Online lenders cut down the processing time

With hands tied and desperation looming, small businesses are left with no other option than to grab loans from whatever source possible. Online lenders are serving as messiahs in this regard because they not only agree to offer loans to both small and big businesses but also they cut down the processing time meaning that getting a loan can be fast-tracked.

Read also: A Cash Business Loan might Just be Perfect for a Working Capital

The terms given by online lenders are often ignored in a hurry

When money is hovering around the faces of small business owners, they quickly ignore to look at the terms. A well groomed banking executive, Jack Elaad argued that though the online lenders cut down the lending time, the terms of their agreement is nothing to write home about.

A closer look at online lender’s terms will shock you

Behind the rosy offer is a thorn which you should weigh carefully before agreeing to the terms of online lenders. Revelations have shown that online lenders offer only short term loans repayment plan and their interest rates are considerably higher than those of traditional banks. Taking a loan with a wrong motive and short repayment plan is one of the reasons about 80% of small businesses would fail in the first eighteen months.

Read also: What You Never Knew about the Small Business Administration Loans

Many online lenders are in partnership with traditional banks

For the singular reason that this is a partnership, online lenders have to play to the tune of the traditional banks, more like an old wine in a new bottle. They make you believe they are in charge while in the real sense, they are fore-runners.

The cut in lending will affect commercial banks adversely

Since many people who are unaware of these hidden terms flock to online lenders, commercial banks would soon begin to lose their customers to these new strategists. Considering that lending is one of the key ways commercial banks get revenue, their income could suffer a plunge.

Read also: Looking for Ways to Finance Your Company: Try Asset Based Lending

Article highlights

  • Small business always faces the challenge of funding.
  • Online lenders are offering a faster means to access loans.
  • Many online lenders are in partnership with commercial banks.
  • The main source of income of commercial banks is through lending.
  • Online lenders usually have higher interest rates.
  • The repayment plan for online lenders is short term which may not favor small businesses.
  • It is tedious to get loans from commercial banks.
  • Not all small businesses would have the collateral for bank loan.
  • Nowadays some banks accept financial statements as guarantee for repayment.
  • Oftentimes, small business owners would desperately take money from any source without looking at the terms.

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