Online-only business loans: Common predatory trends, tactics to watch out for
If you own and run a business or want to start one up, you’ve likely been flooded by direct mailers and web ads from online-only business lenders. Their typical mantra goes something like this: Qualify for a large sum of business capital in a matter of minutes and get the financing within 48 to 72 hours!
Sounds like a pretty clear-cut deal, right? Not really. Many of these pervasive, well-funded marketing campaigns tend to leave out some crucial details — from the exorbitantly high interest rates (up to 150 percent APR) to high-pressure sales pitches designed to attract and retain your business.
Don’t be among the throngs of entrepreneurs who’ve been caught off guard by these predatory industry tactics. Protect yourself and your business by checking out these trends commonly used by salespeople and brokers in this niche financial sector:
You’re likely dealing with salespeople, not trained business experts
If you’ve ever been in high-churn sales or seen the famous play-turned-movie Glengarry Glen Ross, you’ll know the term “always be closing.” This retail speak perfectly captures the spirit and strategy of many online-only business lenders: Always be on the lookout for the next deal.
After inquiring about online-only financing, you’ll likely get assigned to a sales rep who’s focused on selling you a loan and not an experienced business expert with your long-term business needs in mind. What’s more, your assigned salesperson will likely come off as pushy and aggressive in an effort to meet or beat sales goals set by their company.
With many e-lenders, they have little to no concern about your long-term success and actual ability to repay the loan without creating a huge financial drain on your company. This could put you in a position to even lose your business.
At a community lender like CDC Small Business Finance, you’d be dealing with a nonprofit organization whose expert loan officers and business advisors will only pair you with business capital you can afford and makes sense for your future goals.
If you’ve applied for an online loan once, prepared to be hounded
It’s easy to get sucked in by the colorful mailers and eye-catching online ads promising easy-to-land business loans. But know that merely inquiring about such financing can open up a Pandora’s box of irritation and heartburn.
Many mom-and-pop business owners who applied, and in some cases just searched, for an e-loan ended up on call lists mined by brokers and lenders, according to a 2018 study by the Federal Reserve Board. These entrepreneurs reported waves of bothersome and aggressive calls from people trying to peddle their loan products.
“I received 20+ calls a week after I secured a loan with [an online lender,]” said a co-owner of a parking lot maintenance business.
You may be dealing with loan brokers, not direct online-only business lenders
Most online-only business lenders issue the loans themselves. But in some cases, you may instead be dealing with online brokers. Instead of extending you the credit directly, brokers apply for the loans on your behalf. This can present a number of financial disadvantages to you and your business. Since they’ll be shopping around for different loan rates for you, they’ll likely run your credit multiple times, which can lower your credit score. This is important because a good credit score is often your ticket to affordable business financing.
Another downside to working with an online-only business loan broker: The sticker price may not necessarily be the true cost. What they often present their clients is a fattened-up version of the original loan, thanks to tacked-on points and fees.
Fallen behind on loan payments? They want you to take out more debt
Did you know that once you get an online business loan, chances are, you’ll very likely get another one? This a common industry practice called debt stacking. Since many of these loans end up being so expensive to borrowers, default rates tend to be high. This is where loan retention teams come in. If you tell your e-lender you’re unable to make further payments, these teams will try to talk you into rolling the current loan into a new one, essentially creating more debt to finance the old debt. Adding salt to the wound, the new loan is often more expensive than the original debt issued.
Buyer beware: Getting a second loan because you can’t sustain the original loan can lead you down a hole you can’t get out of. And this can have devastating effects on the future of your business.
Consolidating online debt could cost more
Relatively new to the online-only lending space is debt-consolidation companies. Again, if a small business owner signs up for an alternative e-loan, it’s highly likely they’ll take out more online debt in the future. Over time, these multiple payments understandably become unwieldy for the borrowers. Knowing this, consolidation companies promise to negotiate down and repackage your online loans into a new one. The problem here is, the consolidated loan is usually more expensive than what you originally were on the hook for.
Are you considering an online business loan? Know the pros and cons of getting one before diving right in.
Short on time? Not to worry. We’ve tapped experienced business experts who know the ins and outs of the alternative lending market to create a free, interactive guide for you. Simply follow the instructions below to download it!
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Are you looking for affordable business capital to grow or launch your business? CDC Small Business Finance can you help you explore the right loan products to fit you and your business’ needs.
Tell our qualified loan experts about your business, and they’ll work to match you with a financing plan that makes sense for you.
Let’s talk! Reach us at firstname.lastname@example.org or (619) 243-8667.
In case you missed it:
- Getting a small business loan? Know the differences between banks, community lenders and online-only lenders
- How free business coaching through these nonprofits can ramp up your chances of getting a business loan