When to Recommend Online Small Business Loans to Clientsby
There’s nothing wrong with online small-business lending if you and your client both understand why the business needs a loan.
If your client can’t get a bank loan or an SBA loan due to the size of the business or an immediate need for cash, suggest a low-APR term loan from an online lender first. For certain loans, if the business owner’s credit score is good and financial history is clean, the rates for online loans can be close to the rates on a bank loan.
Getting a small-business loan used to be a lengthy process. It could take small-business owners weeks, even months, to get funding from a bank or the SBA. If they needed cash fast, there was nowhere to go but to friends and family. Not anymore.
With online small-business lenders around every corner, it’s easier than ever to get fast cash for a business. However, as the saying goes, when something sounds too good to be true, it probably is. These online loans come with their own set of caveats. But in the right situation, they can be just the kind of help your small-business client needs.
When to Recommend Them to Clients
If your client has fair credit, needs cash, and will be able to handle the monthly payments on a high-APR loan, a short-term online loan may be the way to go. And if your client needs money fast, but doesn’t have the cash flow to pay back a high-APR short-term loan in a timely manner, it may be better to borrow from family and friends or just wait for a term loan rather than fall into a debt cycle.
“I think the important takeaway message is online lending is neither good nor bad,” says Mark Quinn, director of the SBA’s San Francisco district office “The problem is that sometimes we say it’s always bad and we shouldn’t see it being used, or we say it’s always good for every use. “If you use it for the kind of things that benefit the business, it is absolutely something that could be very good.”
Online Lenders Pick up the Slack
In 1995, small-business loans made up nearly half of all bank loans. But when the 2008 financial crisis hit, small-business owners faced a combination of falling sales and lenders who were newly wary of investing in such a high-risk space. By 2012, they made up only about one-third of bank loans, according to a Harvard Business School study. That doesn’t mean there’s less demand for cash for small businesses; far from it.
Small businesses “all want to get a loan that gets approved yesterday and gets funded the day before,” says Quinn. Many small businesses will need money in a pinch at one time or another, and bank loans just aren’t timely enough.
There’s a Time and a Place for Them
Online small-business loans come with different term lengths and annual percentage rates. Some online loans closely resemble bank loans in their terms (up to 10 years at some lenders) and their APRs (the lowest rates are between 6 percent and 10 percent). Other loans are short term, with rates that can reach the triple digits and are intended to be paid off quickly.
Merchant cash advances are a last-resort loan option that require daily payments, taken from a set percentage of a business’ sales every day. This type of loan typically is the most expensive for the small-business owner, as the APR can be up to 350 percent. Business owners must make payments every day, even if they don’t make any profits that day.
They’re Easy to Misuse
Online small-business loans play a valuable role in the market. But if your client doesn’t fully understand the benefits and the limits of the loan, trouble can follow.
“The real horror stories that we hear are folks who get a loan that has a very short term and need it for long-term use, and then have to roll that credit over,” Quinn says. “Then the rollover costs and the renewal costs end up resulting in these outrageous costs of capital for them. It puts them in a debt trap.”
The original post appeared on the Sleeter Group blog. AccountingWEB and Accountex have partnered to bring you this content as we share a belief in the furtherment of the profession through greater insights.â