Business loans can be imposing in their requirements—even for a relatively uncomplicated line of credit—and cloud-based lenders with fast online loan applications have never been more attractive.
Time-consuming updates to your business plan (or creating your first one!), dozens of hoops to jump through, reams of paper and emails flying back and forth, the agony of waiting for approval, then waiting yet again for the funds to become available… It’s no surprise that some business owners look for ways to simplify the process.
They’re seeking faster access to money and a streamlined application process, and don’t mind the “price of entry” for that convenience.
What is the price of entry? It can be an interest rate as high as 40 percent to compensate for lender risk. The fast, streamlined process that is so convenient for the borrower creates more risk for the lender, which they balance with revenue from the higher interest and fees.
Cloud-based lender options have exploded to fill this need for increased convenience, but banks are also adapting to remain competitive. The new online loan product at Horizon Community Bank, for example, offers a competitive rate similar to most business credit cards for a line of credit. The decision is fast, resulting in a business line of credit often available in less than 24-hours.
Lenders should always be compared apples-to-apples, comparing terms and fees across the same type of loan, but here are a few key points to consider that are often overlooked:
- Does location of the lender matter to you? It can be convenient to have a brick-and-mortar banking location, versus an online-only lender with customer service interactions limited to the cloud or phone. If you easily become frustrated dealing with virtual customer service, online lenders might not be the best choice.
- Could you benefit from a long-term banking relationship? If so, using a lender that isn’t limited to just one type of loan might be important. If they only offer quick loans but you know bigger lending needs are on your horizon, it might be better to seek a financial partner with opportunity to grow the relationship as your business financial needs change.
- Is it a lender or a bank? Many don’t know there is a difference. Lenders aren’t required to follow the same federal compliance regulations a bank must follow, so government protections (like Truth in Lending practices) don’t apply. Even if this isn’t important to you, understanding differences and how they might apply to you is wise.
- Does the interest seem high? Be sure to shop around to compare products, and evaluate if a local bank you trust has a similar online loan product that compares to the online product you’re considering. It could be worth investigating, since you’ll get the same convenience, fast approval and end result (money!) at an interest rate that might be substantially lower. The bank might be local, but the low-touch, online process is likely to be identical. After all, is it a bad idea to have a real bank with substantial expertise available if you need it?
- Would a stronger focus on your business be helpful? Online lenders are often focused on the product du jour – the online process is fast, but narrow in purpose. It funnels the customer through the application and approval processes without seeking information about the business, long-term goals and cash flow… the very things that enable a banker to be sure the loan you are seeking is actually a good fit for your business. By giving the lender less information about you and your business, they’re prevented from helping you long-term. If that kind of expertise might be valuable or you have questions about finance and business banking, then a highly experienced banker who looks for a deeper understanding of you can be an incredible partner. They’re focused on the long-term goals, instead of a one-time loan.
Considering these five questions can help you compare traditional banks to online lenders more easily. For some borrowers, online loans are the perfect solution—and for others, it’s a recipe for disaster. As with any contract and financial obligation, though, success depends on reading the fine print carefully today, understanding the nuances and future implications of a decision, and taking time to do a reasonable amount of due diligence before you sign.
Still not sure? We’re here to help. Give us a call and we’ll do a no-obligation consultation to discuss your needs and compare options. You’ll be surprised what we can offer.