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Published November 04, 2016
A weekly look at Wyoming business questions from the Wyoming Small Business Development Center (WSBDC), part of WyomingEntrepreneur.Biz, a collection of business assistance programs at the University of Wyoming.
By Cindy Unger, WSBDC business adviser
“Since looking online for information about business loans, I have been besieged with ads from online lenders. What do you think are the pros and cons of this type of financing?” Janice, Casper
Online lenders, marketplace lenders and alternative lenders are all terms that describe a category of unregulated, nonbank lenders who typically provide financing to small businesses, many of whom banks consider too risky to finance.
They primarily provide term loans, lines of credit and financing for accounts receivable. According to Morgan Stanley, alternative lenders originated about $7.9 billion in small business loans in 2015. Lenders such as Lending Club, OnDeck and Kabbage are leading the pack.
Speed is one of the advantages of an online loan. Application is relatively simple and can be accomplished in minutes. If you are approved, the funds can be issued within days, as opposed to weeks or months with banks.
These organizations have built proprietary analytical models based on alternative data sources. They look at not only FICO (Fair, Isaac and Company) scores, but everything from business sales volume from credit cards or accounting programs, to the amount of time a prospective borrower has used the same email address, and the number of social media friends and contacts. They also consider a store’s rating on Yelp, or the amount of time the prospective borrower spends on the lending website.
Another advantage can be easier qualification. Typically, online lenders look for businesses that have been in operation for at least one year, with revenues of at least $50,000. They also prefer a minimum FICO score of 600. Rates and terms vary, as these borrower characteristics also vary.
On the negative side of the equation, alternative loans can be very expensive. APRs (annual percentage rate) may range from 20-80 percent. There are numerous internet sites that compare various online lending terms. Use them.
Be certain you understand the APR and all fees before closing on a loan. Another negative: Although online lenders typically do not charge prepayment penalties, they also usually do not offer prepayment savings. Whether you repay the loan early or not, you will owe the same amount of interest and fees.
To make your decision, you need to “balance the scales.” If you are in need of a quick loan and also have the ability to repay quickly, then an alternative loan may be a good solution for you. If the bank turns you down and financing is an immediate necessity, then the extra costs associated with an alternative loan may be attractive.
If you are a startup, or can deal with the wait time to obtain a traditional bank loan, then the lower costs may be a better alternative.
A blog version of this article and an opportunity to post comments are available at www.wyomingsbdc.org/blog1/.
The WSBDC is a partnership of the U.S. Small Business Administration, the Wyoming Business Council and the University of Wyoming. To ask a question, call 1-800-348-5194, email firstname.lastname@example.org, or write 1000 E. University Ave., Dept. 3922, Laramie, WY, 82071-3922.