Online Business Loans: What to Watch Out For
Having trouble securing a much-needed bank loan for your business? There are hundreds of other small businesses in your predicament. It is increasingly difficult to get business loans from traditional banks in Australia due to regulatory bottlenecks. This shortage of lending service has led to the rise of online non-bank lenders.
It’s relatively common to find advertisements that promise ‘easy and quick’ approval of a wide range of business loans. But be warned; you might be exchanging short-term convenience for long-term pain. Below is a list of a few things to keep in mind before rushing into a costly deal.
4 Pitfalls of Online Business Loans:
- High Interest Rates: Contrary to traditional banks that charge interest rates of between 5% to 13% per annum, online business loans could attract an annual interest rate of 38% or even higher. You might be wondering how business owners are willing to pay such an exorbitant fee. Well, most of them are not aware of what there are getting themselves into. Most online lenders don’t show the full loan details such as straight annual interest rates. For example, one lenders advertised interest rates of 1% every 2 weeks might seem lucrative, but an in-depth analysis shows that the annual interest rate is significantly higher than what is offered by banks.
- Hidden Fees and Terms: Are the terms and conditions clear? Online business loans are often marred by additional charges, daily cash flow requirements, and other hidden fees that may hurt your business in the long run.
- Poor Regulation: Unlike traditional banks, online lenders are beyond the purview of some regulatory bodies. Borrowing from some lenders means that you have to waive government protection in regards to transparency and limits on interest rates.
- Repayment Sources: Do you have a reliable source of funds to clear the debts? Can you clear the debt in time? How important is the loan collateral (if any) to your business operations? These are questions that you should critically analyse before taking an online business loan. Lack of due diligence may result in sky-high additional fees or even stacking of loans (taking new debt to pay off an outstanding debt).
Always take a step back and reflect on the necessity of business loans. If you are backed against the wall and you need the funds, consider the alternatives below – online business loans should be the last resort.
- Budget Cuts: Can you get by without the business loan? If yes, don’t take the additional debt. Consider cutting down on unnecessary expenses that may be affecting your cash flow.
- Personal Loan: Sure, it’s business 101 to keep your personal life and business as separate entities. But if you cannot secure a business loan, you might have to ignore this norm and apply for a personal loan from peer-to-peer lenders or credit unions that offer reasonable interest rates (9-13%).
- Invoice Factoring: A financial company can pay your invoices at a fee (1.5-5%) to ease your cash flow issues
In a nutshell, you should be wary of non-bank business lenders. But if you don’t have any other alternative, don’t be lured by the attractive texts and illustrations in their advertisements. Peel back the layers to see what they really offer – it might be a wolf in sheep’s skin!
This is an area we strongly recommend that you chat to your Highview expert about, we are here to help guide you through this process and ensure your decisions are well- considered and are the ‘best fit’ for your business. Contact us today.
Source: Mybusiness.com.au and Janelle Bartlett’s article from Chan & Naylor Redlands published August 2019.