While researching business loan options, most people come across lending products offered by online lenders. In some cases, the rates and terms offered are better than what you find with business loans through traditional outlets like banks. As a result, online business loans are typically tempting options, but does that mean they’re safe?
Fortunately, by learning a bit about online lenders, you can figure out if using one is the right move. If you’re wondering, “Is it safe to get business loans from online lenders?” here’s what you need to know.
What Are Online Business Loans?
Online business loans are financial products that people can access through online applications and accounts. According to FICO, online lending comes in two primary forms. First, there are online-only lenders with no physical locations. Second, there are online lending services connected to traditional lenders, such as banks with brick-and-mortar branches.
However, the term “online lender” is more commonly associated with non-bank companies. Those companies aren’t eligible to accept deposits from customers, which separates them from traditional banks.
Functionally, online business loans are similar to those available through more conventional financial institutions. The online lender assesses a company’s eligibility during the application process. If approved, the online lender provides the funds, and the borrowing entity repays the money – along with interest and fees – in accordance with the terms.
However, not all online lenders are what they seem on the surface. As a result, it’s critical to evaluate them carefully before applying.
Are Online Business Loans Safe?
There is a wide array of online business loans on the market. Some of them are generally safe, while others are predatory in nature. Plus, some websites that look like they’re from legitimate online lenders are actually scams.
Scams are pervasive in general, with the Federal Trade Commission (FTC) reporting $5.8 billion in consumer fraud losses in 2021 alone. While that figure isn’t solely based on online lenders, it showcases that the risk is real. As a result, it’s critical to evaluate online lenders carefully.
Signs a Lender Is Unsafe
When you’re exploring business loan options, it’s wise to seek out potential red flags that could indicate predatory or other unscrupulous behavior. Requiring a payment up front is a classic sign of a scam. Additionally, not listing a physical address for the company is a warning of a potentially unsafe online lender. Unsolicited offers to apply could also indicate a scam, and no encryption on the website is a bad sign.
Another red flag is any guarantee of approval. Reputable lenders will always evaluate your application to determine eligibility, and they will deny those who don’t meet certain requirements. If an online lender essentially says everyone gets approved, that should give you pause.
Finally, if the loan terms offered don’t align with norms, essentially being far better than your credit score or similar details should support, treat that as a warning sign. There could be hidden fees or other catches, leaving you on the hook for far more than you initially expected.
How to Evaluate a Lender
When you’re evaluating an online lender, make sure the website has strong encryption, specifically “https” at the start of the URL. A high Better Business Bureau (BBB) rating and positive reviews are also good signs. It’s similarly wise to check the company’s social media pages and review the comments or perform a search there to see what people are saying, as you may find comments that give you a better idea of the lender’s quality.
If possible, talk to other business owners to see if they can personally recommend a lender you’re considering after that point, as their past experience could help you learn details you don’t see elsewhere.
