Building a business isn’t easy, especially when you’re starting out. While countless commercial lenders offer business loans, it can be tough to get approved unless you’ve been in business for a while and have a strong track record.
What’s more, the application process includes a lot of paperwork and waiting until you get approved.
In recent years, though, online business lenders have emerged, making it easier for business owners to get approved for financing. Not only do they offer faster funding times, but they also tend to have less intense eligibility requirements.
What to know about online business loans
There are plenty of legitimate online business lenders out there, and they can provide business owners with an easier and quicker way to get the capital they need. But there are a few trade-offs you’ll make when you choose an online business loan over a bank loan.
For starters, online business loans tend to charge higher interest rates than bank loans. This is partly because their underwriting process isn’t as intense, so there’s more risk involved for the lender.
Depending on the lender, you may also end up with a prepayment penalty on your loan, making it expensive to pay off the loan in full before it’s due.
Finally, getting a business loan online could expose your business to scams if you’re not careful. You can avoid this risk entirely by comparing online lenders on reputable websites like Nav. But if you if you expand your search, it’s important to know how to recognize the red flags.
How to spot online business loan scams
If you don’t qualify for a bank business loan or you need money fast, it’s essential that you do your research on potential lenders. Here are some things to watch out for along the way.
1. They’re asking for money up front
Scammers don’t actually have the money they promise to borrowers, so they may tell you they’ll get you the money after you pay an advance fee with your application. Depending on the scam, it can be anywhere between hundreds and thousands of dollars. Once you pay the “fee,” though, the scammer disappears.
No reputable business lender will ask for money from you up front, so if that happens, move onto the next option.
2. There’s little information online
While online business lenders typically don’t have brick-and-mortar branches like a bank, they do have headquarters. As you research lenders, look up their physical address and other information about the company.
If there is no physical address or you can’t find any other information about the company, it may simply not exist.
3. They’re contacting you
You may get a pre-approval letter in the mail from a lender or an email if you’ve signed up for its mailing list. But legitimate business lenders will never email you personally with a loan offer, especially with specific terms.
The same goes for loan offers on websites like Reddit, Craigslist, or Facebook. If you see one of these, just keep scrolling.
4. They’re a cash advance lender
Scammers try to capitalize on your emotions to snare you, and desperation is their favorite one. If you need cash fast, cash advance lenders can get you what you need. And while they’re technically not a scam, they are predatory in nature, charging exorbitant interest rates and fees.
Keep in mind that many reputable online business lenders offer merchant cash advances, which are a good option if you have bad credit or you have seasonal cash flow problems. But check the terms of the loan before you sign.
5. They guarantee approval
Even if you have stellar personal credit and your business is in great shape, lenders are still taking on risk when lending you money.
And because some business owners have terrible personal credit and no track record of success in their business, it’s hard to believe that any legitimate online business lender would offer guaranteed-approval loans.
6. The terms are too good to be true
If you’re a brand-new business owner or have problems with your credit, it’ll be tough to get an online business loan with a low interest rate, if at all. So if you get an offer with unbelievably favorable terms, chances are that the person who shared the offer is up to no good.
7. They’re aggressive
Reputable online business lenders want business, but they’re not desperate for it. If the person you’re working with gets pushy because you’re taking your time with your research, it’s safe to say that you’d be better off looking elsewhere.
The bottom line
Online business loans are a legitimate way to get financing for your business, but they’re generally best for business owners who can’t qualify for a bank loan or need capital fast.
As you shop around, though, keep an eye out for scams that could pose a threat to your and your business’ financial stability. With the red flags discussed above, you have a good start. But even if you don’t see any red flags on the surface, still listen to your gut. If it’s telling you something isn’t right, it’s probably right.
This article was originally written on November 22, 2018 and updated on January 27, 2021.