Recently, online lenders have multiplied, offering small business owners more options to access the capital they need for their small businesses. However, some of these lenders are not transparent about their terms, and small business owners have faced obstacles in successfully paying back while continuing the operate their businesses. Many of these financing options have a time and a place, and knowing how to evaluate them can help you determine the best fit for your small business.
Revenue-based loans
These are term loans, but unlike a merchant cash advance, these loans have a fixed daily payment regardless of sales. Another major difference between revenue-based loans and a merchant cash advance is the daily payments are withdrawn from your account, not withheld from your sales. Because your daily payment stays the same and the loan is sold based on a “factor”, it’s easier to calculate the total cost of the loan than the total cost of the merchant cash advance. For example, if you choose a $3,000 loan over 6 months at a factor of 1.3, you’re agreeing to pay $1.30 for every $1 you borrow. Your total repayment would be $3,900, before fees.
For revenue-based loans, consider the return on investment. Do you have a big contract secured and need to purchase materials to deliver on that contract? Perhaps total revenue from the contract far exceeds the cost of the loan. That might be worth it for your business growth. However, if you do not have secured revenue, you may end up overdrawing your account as the daily payments are automatically withdrawn. In that case, the additional overdraw fees will add to your total debt.
Online loans with higher interest rates
These are also term loans, generally with a slightly longer term (it could be a loan that you repay over years instead of over months). These offer a monthly payment instead of a daily payment and often end up with interest rates that resemble a credit card. To evaluate if this loan is a good fit and to understand all the fees, you may want to ask what your total repayment amount is. From there, you have a better sense of the cost of this loan for your business.
Some additional considerations
Stacking: Small business owners have run into challenges because of “stacking” or having more than one of these loans at once. The total costs end up being very high, so it makes sense to carefully consider loans and the total debt obligations of your business before you decide to take on an additional loan.
Fees: Some of these lenders incorporate a considerable number of fees, and you may be able to negotiate those down. Consider negotiation as a way to try and make these options as affordable as possible.
Brokers: Many of these lenders employ brokers who take home a percentage of your loan. Look critically at all the fine print and the detail of the terms and fees to help you assess if this option makes financial sense for your business. There may also be broker fees that you can negotiate as part of your final agreement.
There are a number of APR calculators that you can use to help you determine the total cost of your loan. Share your tips and best practices with us on Facebook.
