Is Online Credit a Viable Alternative to Bank Loans?

| February 6, 2013
Online Credit

Online Credit

Nowadays, many small business owners find it hard to get loans for business start-ups or expansion because banks usually associate small business with a high risk of default. Banks are always more than ready to lend money to established clients with concrete credit histories at very reasonable rates and tend to look disregard small businesses.

Private lenders have come up to offer the much-needed alternative to bank loans. They are many in number and always provide easier loan access with high interest rates. Whenever a small business owner requires a loan, he or she rushes to a private lender.

The new thing about private lenders is that they have an online presence. Computer network not only offers a good platform for the social media, but also a good forum for borrowers and lenders to engage in active and productive business.

Are online lenders providing small businesses with a reliable alternative to bank financing? The answer to this question is yes, but it mainly works with savvy business people.

Private lenders are usually forced to charge higher than banks because of the risk of you defaulting on your loan. They accept to get a compensation for accepting to take a risk or risks that banks cannot take. The higher interest rate is also referred to as risk premium, and the interest rate you are expected to pay is determined by various factors such as the nature of your business and your business or personal credit history. If your business is new and lacks credit history, you will have to pay more.

It is very important for you to note that a number of online and traditional lenders usually accept to finance even applicants with poor credit history. They also lend money to business sectors that banks decline to serve. Online lenders have managed to rationalise the process of application and provide guaranteed acceptance within very few days. The differences between online lenders and banks come out clearly in the interest rates they charge. Bankers not only find it hard to deal with loan defaults, but they also dislike repossessing assets. Instead, they prefer seeing regular cash flow in their coffers. Private and online lenders usually accept higher risks because they expect to get compensations for doing so.

Before you accept financing from any lender, it is very advisable for you to take a number of factors into consideration. A loan agreement is like a contract and is made of more than an interest rate. You should read it carefully to see if it prevents you from accepting other financing or borrowing more money. Such terms are known as covenants and if violated, might have to be repaid instantly. You should also know about the penalty for late payment or default, if the lender requires collateral, or if you have to maintain a minimum account balance. Be careful of interest escalators clauses designed to increase interest rates after a period of time. Avoid clicking on the “I accept” button before going through the whole contract. It is also very necessary to contact a lawyer.

Lastly, you must know who you are doing business with. Due to the fact that all lenders will be asking you for your personal and credit information, ensure that they are very legitimate.

Is Online Credit a Viable Alternative to Bank Loans?

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