Online loans can be quick and easy. They can also bring a lot of long-term pain.
Over the past few weeks, I’ve received calls from former clients with whom my company worked successfully to line up loans that enabled them to grow their businesses. These were longer-term loans with reasonable interest rates and solid repayment terms.
Unfortunately for these businesses, they’ve run into speed bumps and were pressed for more capital. Instead of going through the same channels, they went with financing from online lenders (sometimes called alternative lenders or marketplace lenders) because they thought it would be both easier and faster.
Those clients weren’t wrong about the ease and speed, but their short-term relief comes with a negative side-effect: long-term pain.
By securing an online loan, they invariably had liens placed on their business. That not only affects the ability to refinance, but it also creates major cash flow pressure because the monthly repayment is going to be high thanks to exorbitant interest rates.
There are other potential disadvantages to using online lenders.
Aside from the high interest rates, many online lenders are less established than traditional banks, so there’s a higher possibility they go out of business. Dealing with a loan from a defunct entity is not something you want to do. And keep in mind that online lenders aren’t always subject to the same regulatory authorities as brick-and-mortar banks; there’s even a higher possibility that your financial details get hacked.
In addition, the loan terms will be less favorable (you’ll probably deal with things like pre-payment penalties), you’ll get little to no counseling from the lender and you’ll likely need both good personal and business credit, not to mention a few years of experience in business to be approved.
So, what’s a needy business to do?
Slow down, you’re moving too fast
For one thing, years of experience show that the crisis’ entrepreneurs face aren’t always as bad or as pressing as believed.
That means, it’s a good idea to slow down and take a step back before acting. Ask yourself if you really need to obtain additional funding so quickly.
Instead, there’s a good chance that you might be able to line up funding you need through a Small Business Administration-backed (SBA) loan, particularly if you already have worked with the SBA. Yes, it’ll take more time and the paperwork can be a bit of a hassle, but the reward of not being a slave to your loan is certainly worth it.
You have another option too, in some cases: Don’t do anything. Try to get by without taking on additional debt.
That may mean budget cuts and slower growth for a while. And that’s OK because you’ll be better positioned for growth when you pass the bump in the road. If your cash flow is strangled by short-term online debt, you may never get past that bump!
Online loans have their place, but they should be considered a last resort when you have no other options to keep your business afloat. And if you decide to take one, make sure you read the fine print.