Are You Risking Your (Small) Business By Taking An Online Loan?

In our last blog post I stressed how small businesses are constantly looking for cash infusion. A positive cash flow for a small business provides breathing air much needed to grow, to renovate, to buy new equipment or just to free some needed capital. This task has proven challenging when turning to traditional banks and requesting a loan. Most businesses are turned down, desperately seeking other alternatives.
On my way to meet Jack Elaad for this interview, I heard a radio commercial for a new company offering loans to small businesses. I asked Elaad, a seasoned banking executive - former Chairman of FIBI (Israel's Top 5 bank) and Co-Founder of Credithood, a Fintech startup - for more information about this new trend of SMB online lending. I was intrigued since it sounded attractive - can SMB owners get approved this quickly? "This is where it begins and where it stops," says Elaad, "the online lenders managed to cut down the processing time, but not much more. If you looked carefully you'd see that the loan terms are not great at all."

So I did look into it, and found out that many online lenders only offer short-term loan repayment plans with interest rates that are quite high. Moreover, as Elaad points out, many online lenders are working in cooperation with traditional banks, like a modern "storefront." They make it sound "cool" and "always on" but they must abide by the same rules and regulations derived from "old school" banking.

Traditional banks have a lot to lose, as lending is one of their key revenue streams and wealth generators. They need to stay prominent even in face of online trends -- hence their close cooperation with the new players. Few examples: US online lender Kabbage just raised a mammoth $135 million from investors including Dutch bank ING and Canadian bank Scotiabank. In April, Prosper announced $165 million in from investors that included SunTrust Banks, JPMorgan Chase, BBVA and Credit Suisse. Moreover, USAA, BBVA, and SunTrust are working with Prosper to offer co-branded loans. Its main competitor, Lending Club, currently has co-branded relationships with Union Bank and community banks that are part of BancAlliance.

So are we looking at a wolf in sheep's clothing?

The biggest caveat is in the loan terms. Even with greater accessibility and speed, the loan terms can still make or break a small business. With some data showing that over 80% are likely to fail in the first 18 months, SMBs need to build a healthy business. Taking a loan with the wrong terms could jeopardize their business, and their ability to repay short-term loans is limited.

According to Elaad, "the key to small business lending is to distill the business information and get to the core of their story. Not just their Facebook profile, but their likelihood to succeed. We founded Credithood to be at the frontier of small business financing. The questions that we look to answer are - is this small-business owner recognized as a valuable member of the community? Does this business have a loyal customer-base?" Answering these questions opens a lot of potential prospects.
And what we do with the answers to these questions -- in our next blog post.

Stay tuned!