<big>T</big>he 2008 financial crisis was particularly tough on small businesses.
Banks that were supposedly “too big to fail” were not equipped to provide the funding small businesses needed for growth.
This left a funding gap of hundreds of billions of dollars which banks left on the side-lines, hampering small business owners from investing in 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 could not efficiently fund small business loans, the small business owner paid the price — literally!
Now that the economy has improved, there are more small businesses than ever seeking funds to grow their business, hire employees, consolidate high interest debt and more. However, there are now many more lender choices than ever before for the small business owner to consider. So how should the financially savvy small business owner choose a lender that is a good fit?
Here are some guidelines:
Lenders should disclose an annualized interest rate or APR in an easy-to-understand manner. Although APR is widely recognized as the standard for loan cost, SmartBiz recommends using the "Loan Constant" to discover the true cost of a loan. Learn more about the loan constant here.
No Hidden Fees
When researching loans, don't forget about additional packaging or other types of fees. Lenders should clearly state the fees that will be due before a loan is funded and during the life of a loan.
If borrowers don’t completely understand the fine print, they can get trapped in a high-cost loan with difficult to make payments. Some lenders even require daily payments. Information that should be easy-to-understand includes the total loan amount, the payment amount and frequency, collateral requirements and any prepayment penalties. A quick and easy glossary of small business lending terms can be found here.
Is there a quick and easy way to reach your lender? If you’re working with an online lender, can you pick up the phone for any questions or concerns? When you call your lender, you should have a dedicated representative that is familiar with your business and your application. An unresponsive lender could be a red flag.
Consider a Small Business Administration (SBA) Loan
The Small Business Administration (SBA) offers loans designed to meet the financing needs for wide range of business types. The government isn't directly lending small businesses money. Instead, the SBA sets guidelines for loans made by its partners. SBA loans have some of the lowest interest rates and longest terms available for small business financing.