Not all online lenders are the same. When you’re evaluation this type of alternative business financing, there are many things you should consider before saying “yes.”
Three Red Flags When Choosing an Online Lender
If you need quick access to financing for your business and are thinking about an online loan, there are several important considerations to have in mind. Before you complete an online loan application, do your due diligence on the online lender. Here are three online lender red flags you should not ignore.
Red flag #1: Cost &and terms of the business loan are not clear
When comparing online lenders, it is important to review the loan cost and terms. Keep in mind each lender will not display the cost and terms in the same way. It is up to you to lay out your options in an apples-to-apples manner. Take a look at the big picture – the amount you will pay over the life of the loan. To help you uncover the true cost and terms of an online loan, be certain you have answers to the following questions:
- What is the repayment amount?
- What is the dollar amount of my payments?
- What is the repayment term?
- Is it daily, weekly, or monthly?
- What fees will be added to the loan amount?
- Is there an origination fee? If so, what is it?
- Is there an application fee? If so, what is it?
- Is there a closing fee? If so, what is it?
- Is there an early-prepayment penalty? If so, what is it?
The best way to compare loan options is to calculate the annual percentage rate (“APR”) for each loan, which incorporates the items listed above. To learn more and for a step-by-step guide on how to calculate the APR of a typical online loan, reference our article on the true cost of a typical online loan.
Red flag #2: Security of online lender’s website
Is your data is being protected by bank-level encryption and protection systems? When making any online transaction, it is important to make sure you are doing so on a secure site – this is especially true when applying for an online loan. You will be sharing a lot of sensitive information with the lender, including tax returns and business financials.
Take the time to make sure the website has a security certificate and a valid URL address. If the web address looks suspicious or there are no signs of security measures, this is a red flag you should not ignore. In a world of online hackers and security breaches, it is imperative you protect your business information from getting into the wrong hands.
Red flag #3: Lack of minimum requirements – just because you qualify for a loan, does not mean you should take it
Reputable online lenders have a set of minimum requirements for potential borrowers. Lenders want to learn what the risk associated with the loan is and craft the terms accordingly. Most lenders – online or not – look at your credit score and your financial statements and/or projections, to name a few basics. There are a variety of factors that go into a responsible lender’s decision to loan money to a business owner. After all, they are looking to get paid back at the end of the loan term.
Be aware of online lenders that do not require a minimum credit score and other basic information. This is a red flag for borrowers as these lenders typically charge a very high-interest rate to make up for taking on high-risk borrowers.
These lenders exist to sell you debt, and then more debt to help you keep up with loan repayments. You can find yourself trapped in a cycle of debt you cannot climb out of unscathed. There is no such thing as easy money. And if the online loan application gives you the sense that anyone can get approved for a loan, take a closer look at why you are selecting that particular lender and if you can afford the cost and terms of their loan product.
Find a responsible online lending partner
If you are considering an online loan, find a responsible online lending partner that has your best interest in mind. Explore alternative, lower cost financing options available through community lenders, such as Community Development Financial Institutions (“CDFIs”). You can start by learning more about Pursuit’s SmartLoan, which offers loans from $10,000 up to $100,000 with affordable monthly payments.
