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Why Do Online Lenders Have High Interest Rates for SMEs?

Posted April 15, 2019 by EasyFinance.com to Finance 0 0

Online lenders offer SMEs a chance to succeed even if those don’t meet the exceedingly high loan eligibility requirements set by banks. By doing this, the lenders take great risks, which is the main reason why their interest rates are higher. However, despite the extra cost, taking a loan online is worth it due to the sheer number of advantages this option has. One also shouldn’t forget that in many cases this is the only option a small business has.

Advantages of Online Loans for Small and Medium Businesses

Advantages of online loans are many, but the most important of them is convenience. This is definitely the main reason why these businesses have been booming for the last few years. For example, in the US, the amount of financing provided by these lenders has grown to billions from $100 million it was in 2009. Experts predict that even rising rates won’t slow down the rapid growth of these financing businesses (CNBC News). So, these loans are convenient, which means that they are easy and quick to obtain. This is because online lenders have a very simple approval process. They require very little paperwork beyond the proof of identity and some basic documentation that shows you are capable of repaying the loan. Note that the latter can be negotiated as these lenders are often flexible and open to financing promising startups. Online money transactions are also rather fast, which means you’ll get your financing as quickly as possible if you prepare your paperwork right. In the majority of cases, the entire process shouldn’t take much more than a couple of days. Another major advantage of online loans for SMEs is that you can find lenders that don’t require any collateral. This increases the accessibility of loans making them available to every business owner who needs them. Small business failure rate is still quite high, but with this financing option, it might go down as companies get an opportunity to normalize their cash flow fast. This means that it should be easier for a business to get through a rough patch. Your credit score also matters very little for online lenders. Unfortunately, the number of people who use online loans remains small at the moment, and the number of businesses is even smaller. This is caused by both the lack of awareness about this option and lack of trust in online financing.

The Greatest Disadvantages of Online Loans

The advantages of online loans come for a price, and that price is that the lenders’ interest rate is often higher. The main reason for this is directly tied to the main reason that makes hundreds of SMEs seek out these loans, which is that lenders work with clients that are classified as ‘high risk’ by banks. Therefore, the loans themselves are extremely high risk to lenders. It’s true that they have a huge pool of prospective customers due to the fact that they are the best most convenient kind of alternative lender. However, many of those potential borrowers are unreliable and very likely to default on their loans. With no collateral and very little paperwork involved, it will be nearly impossible for the lender to get their money back should their client prove unable to keep up with their financial obligations. Hence, high interest rates are essential to minimize the losses these businesses suffer while trying their best to provide financing to every business in need. There is also the matter of few people using these services today. While this number has been steadily growing, it’s hardly enough to support a financing provider. Therefore, online lenders simply cannot afford to offer low interest rates. Their own businesses will collapse if they do. However, these lenders are also very understanding, which means that you might get a chance to negotiate a lower interest rate. To achieve this, you’ll need to shop around for a lender willing to listen to your proposal and then prove that your business has a chance to succeed. Unfortunately, this flexibility is also one of the greatest disadvantages of working with online lenders. It’s possible only because the industry itself is barely regulated. On one hand, this allows lenders to offer good deals to high-risk businesses. On the other, it creates a breeding ground for scammers. Therefore, you need to be careful and only do business with trustworthy lenders with long history and good reviews.

Should SMEs Use Online Loans?

Online loans are definitely a great financing option for small and medium businesses in certain situations. They are easy and quick to get, which means they are perfect for you in case of an emergency. It’s true that the approval rates for business loans from banks have been rising recently (Forbes). However, this isn’t enough to provide financing for every ambitious young company out there. Therefore, for a great number of SMEs, online loans remain the best and sometimes only financing option.

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