Choosing a Small Business Lender
<big>T</big>he 2008 economic crisis was particularly tough on smaller businesses.
Banks which were supposedly “too big to fail” were not equipped to provide the funding small businesses required for growth.
This created a funding gap of hundreds of vast amounts of dollars which banks left around the side-lines, hampering small business owners from purchasing their businesses and putting people back to work.
“Alternative lenders” offered to fill the funding gap at sky-high APRs up to 150%. Because banks couldn't efficiently fund small company loans, the little business proprietor paid the cost – literally!
Now the economy has improved, there are more small businesses than ever seeking funds to develop their business, hire employees, consolidate high interest debt and much more. However, there are now a lot more lender choices than in the past for that small business owner to think about. So how if the financially savvy small business owner choose a lender that is a good fit?
Here are a few guidelines:
Transparency
Lenders should disclose an annualized rate of interest or APR in an easy-to-understand manner. Although APR is more popular as the standard for loan cost, SmartBiz recommends using the “Loan Constant” to uncover the true price of financing. Find out more about the loan constant here.
No Hidden Fees
When researching loans, don't forget about additional packaging or any other types of fees. Lenders should clearly state the fees that'll be due before a loan is funded and through the life of the loan.
Plain-English Terms
If borrowers don't understand fully the small print, they are able to get trapped in a high-cost loan with hard to make payments. Some lenders even require daily payments. Information that needs to be easy-to-understand includes the entire loan amount, the payment amount and frequency, collateral requirements and any prepayment penalties. A quick and simple glossary of small business lending terms are available here.
Availability
Is there a quick and easy method to reach your lender? If you're working with an online lender, can you get the telephone for just about any questions or concerns? When you call your lender, you should have a dedicated representative that's familiar with your business as well as your application. An unresponsive lender might be a warning sign.
Consider a small company Administration (SBA) Loan
The Sba (SBA) offers loans designed to meet the financing needs for wide range of business types. The government isn't directly lending smaller businesses money. Instead, the SBA sets guidelines for loans produced by its partners. SBA loans have several the lowest interest rates and longest terms readily available for small business financing.