With the IPOs of LendingClub and OnDeck and the recent $150 million funding for FundingCircle, it’s an exciting time for the non-bank business financing industry. These loans promise a much better customer experience than banks can offer, but it can be costly. As a business owner, how do you take advantage of these new products and get the best out of it? Here are some tips:
Don’t make quick decisions
Almost all online lenders would say that they exist to help small businesses grow or that they put the customers first. In reality, the non-bank lending industry is plagued with bad actors who engage in pressure selling and who oftentimes push not the most affordable product for their clients but the most profitable one for themselves. In this shark-infested environment, it’s important for business owners to really understand their options before committing to a loan. After all, it’s a big decision that will typically cost at least thousands of dollars and impact your cash flow for the next few months if not years down the road.
Understand the cost and terms
Business loans have many different variations — term loans, daily ACH debit loans, receivable based financing, and merchant cash advances, just to name a few. Each type of loan has its own cost and term jargons. For example, a term loan will quote the origination fee, the annualized interest rate and the repayment duration, while a merchant cash advance will quote the factor rate and the revenue share percentage. So how do you compare across different loans? A reasonable way is to compare all these loans on an APR basis or a total cost basis. Nav offers business loan calculators to help compare all these different types of loans. For example, you might be surprised how a 20% interest short term loan is more expensive than a 30% term loan in terms of both APR and total cost. These are great tools to help you figure out the true cost of your potential financing options.
Another big catch you want to pay attention to is the prepayment penalty. Most term loans have no or little prepayment penalty, but the prepayment penalty can be really steep for short term loans and merchant cash advances. Before committing to a loan, make sure you understand the prepayment policy. For example, if you get a short term loan with 20% interest (on the borrowed amount) that will be paid back in 12 months, ask the lender what happens if you want to pay back the loan in 6 months. Do you still have to pay 20% of the borrowed amount as the interest or you can just pay 10%. These are important details that will greatly impact your cash flow.
Know where your business stands and shop around
Nav recently helped a customer refinance his loan. He has a well established profitable business with millions of dollars of annual revenue. He was turned down by a bank, but he is really not that risky. Originally he obtained a short term loan but after further research, he successfully refinanced to a 2-year business term loan from LendingClub and the application process is no more onerous . His overall APR decreased from 50% to 13%. He also saved 48% on total financial cost and lowered his monthly payment by 60%. If your business is well established, compared to 3 years ago, there’re a lot more financing options today which aim to offer a much better experience than banks and a much lower cost than short term lenders. Spending a few hours shopping around can potentially save you tens of thousands of dollars on financing cost.