As a result of the Great Recession the flow of capital to entrepreneurs and small businesses went from a uniform stream to a trickle. Traditional financial institutions largely closed the capital pipeline as they considered small businesses to be too risky a venture.
Even today when banks are saying they have money to lend, the reality is that they only want to make the safest small business loans. With the Great Recession having tanked the personal equity of entrepreneurs and small business owners, these once good-risk customers turned into off-limits applicants.
With this unsatisfied demand for small business capital, the online lending businesses is becoming a significant player in the capital access market.
According to a Wall Street Journal story by Peter Rudegeair and James Sterngold, the online small business lending industry could see 68% increase this year over last year reaching an eye-popping $7.9 billion in loans.
However, the reporters point out that having more online small business lenders brings more aggressive competition and potential problems for those using the service. While brick and mortar institutions proceed with over abundant caution, these online lenders appear to want to throw money at small businesses.
And there is the red flag.
Small business owners who take out online loans are being targeted by other online lenders to obtain more loans and cash advances. According to the WSJ story, the cash advance “annual percentage rates on interest and fees can run to well over 100%.”
While this level of usury doesn’t rise to the obscene predatory lending practices we have seen in the individual market where interest rates are often over 300%, entrepreneurs and small business owners might be the next frontier for profit-hungry online lenders.
Small businesses often need capital to develop and grow. But unwise loans not only can sink a business, they can ruin an entrepreneur and their family’s lives.
Caution is strongly advised when obtaining an online business loan as well as getting help from a reputable business or financial consultant.