Recently we discussed the rapid growth of non-bank lenders (internet loans) in the financial marketplace. Their emergence has resulted from the reluctance of traditional banks to engage in the small loans typically needed by small business owners. This new category of lending is indeed innovative, makes the process simpler and easier, and offers consumers greater flexibility in loan options. But being new also has its drawbacks. Few regulations have been instituted in this category, which means there’s a greater possibility for consumers to fall prey to predatory lending practices.
When it comes to evaluating an internet loan, we’ve put together a few key components that consumers should evaluate prior to signing up.
How Much to Borrow
This was an important lesson learned during the mortgage crisis. Simply because you “qualify” for a certain amount, does not mean you should take it. Homeowners quickly, and sadly, learned that qualifying for a $500,000 mortgage, did not mean they could actually afford a $500,000 mortgage. And they ultimately ended up in foreclosure. Similar guidelines apply with an internet small business loan. Start by determining what you can actually afford, then look to borrow just that amount and nothing more.
Credit Line Amounts
Like a lump sum loan, credit line amounts should be capped as well based on actual budget feasibility. Stephanie Robl, owner of Ten Key, Inc. uses a simple rule of thumb when helping small businesses decide how much to take out in a line of credit — try to stay between 10-15% of gross sales.
Unique Business Needs
Make sure you find the right loan for your business and your business goals. Are you looking at steady growth over multiple years, or rapid growth where your capital needs change quarter to quarter? Larger, long-term traditional loans are better for the former. In contrast, short-term, flexible loans will work best for the latter.
Terms and Conditions
It may seem obvious, but understanding the nitty gritty of the loan terms is essential. It’s not just the interest rate, it’s the APR, origination fees, collateral, repayment requirements and prepayment penalties. There can also be limitations placed on what the capital is used for. Currently, comparing loans side-by-side is a difficult task, but you must do this to avoid being taken advantage of. Take the time to compare as many apples to apples as you can.
Loan Company Research
Finally, do some research into the company you’re doing business with. Are they disclosing their loan practices, not doing credit reporting on their loans, double-dipping on refinancing, or stacking loans? Have they signed on to the Small Business Borrower’s Bill of Rights? As this industry grows, the watchdogs and activists are reporting more on the companies that are doing right by consumers, as well as the ones to avoid.
Small businesses are the backbone of our rebounding economy, and they require access to capital to fuel that growth. Internet loans are rapidly increasing in popularity because they are fulfilling this need. Smart business owners should go into the loan process with eyes wide open.
If you’re considering loans of any kind for your business, let Ten Key, Inc. help you evaluate the options and make the best decision both short and long-term for your business.