Throughout the tech boom, California has been home to some of the biggest businesses, as well as many small businesses trying to join their ranks. Silicon Valley has become synonymous with billion-dollar corporations. Even in times of crisis, California still holds lots of promise for budding entrepreneurs and tiny startups.
As it has become easier to start a business, with the internet giving everyone access to a huge potential client base, getting the right funding has become the first hurdle to overcome. The holy grail is to find a venture capitalist who can see just how far your business can go.
But there are only so many businesses which will secure big funding rounds. Taking out a small business loan has remained one of the most surefire ways for California businesses to get off the ground.
In the past, banks were the only real option for most small business loans in California. However, with banks typically remaining stuck in the past, new options have sprung up. There are now many private lenders to choose from. Notably, many of these lenders operate solely online.
Should entrepreneurs trust online lenders for business loans in California? There has been a lot of talk about predatory practices and the dangers inherent in these types of loans. Let’s take a look at why these online lenders have become so popular, and whether they are following ethical practices and can be trusted.
The online lending trend
It should come as no surprise that online lenders have become popular for businesses. Simply taking the paperwork online would have been enough to get most people on board. However, it is not just convenience that attracts business owners.
When you apply for a business loan online, you are taking the fast route. Applications are processed speedily and funding is provided as soon as it is approved. You don’t have to wait for the slow wheels of bureaucracy to turn.
There are also more options available for small business owners. Even if you have no assets to use as security, bad credit history, and other marks against you, you are likely to find an option for which you are eligible.
Of course, that’s also where much of the sense of dubiousness comes in. Easy access to business loans comes at a cost.
The dark side of online business loans
There is a reason that business loans traditionally take time to process. The bank or lender is doing its due diligence to ensure that they can trust you to pay them back. When they have substantiated your trustworthiness, they can provide funds at low interest rates on good terms in the knowledge you are likely to be a good customer.
This process is less than perfect. We have seen time and again that a business’s history is not always a good indicator of future conduct. There are plenty of business owners with huge potential who are stymied by checks and balances that aren’t really relevant to them. Nonetheless, it gives the banks what they need to offer “safe” loans.
While some online lenders do their due diligence and won’t offer loans willy-nilly, others are more opportunistic. They offer struggling businesses loans that come with massive interest rates and poor terms. The business may temporarily benefit, but are ultimately left in crippling debt that ends up causing their ultimate bankruptcy.
Some have compared these kinds of loans to payday loans. The payday loan industry is famously predatory in its lending practices. Payday loans offer individuals an immediate influx of cash to see them through the rest of the month. But the huge interest rates mean that these individuals end up spending far more than they can afford paying back a small loan. Millions of Americans have ended up in major debt because of payday loans.
Online business loans can seem similar. They are often billed as the only solution to businesses which are on the verge of collapse, yet offer only a short term fix. Eventually, it is the loan that causes that collapse, rather than the original problems.
However, many of California’s small businesses have taken out online loans and been successful in the long run. Is the comparison to payday loans fair? Or are there ethical companies who should not be tarred with the same brush?
Ethical lending
Among California small business financing companies, there are many ethical lenders. This is true in terms of online lending as well.
There are a range of online business lenders in California offering products which are designed to help companies grow, rather than to simply make money off their failures. These lenders may provide quicker and less stringent loans to small businesses in urgent need, but they do so with checks and balances in place.
In other words, a company can get a loan from one of these lenders even though they might not have gotten the same from a bank, but that does not mean they don’t have to substantiate their application.
There are a number of ways to differentiate ethical online lenders in California with predatory lenders. First and foremost, you need to look out for offers that are too good to be true. These inevitably come at a huge cost. From there, you need to assess whether their interest rates are fair or not. Compare with the average interest rates offered by the banks.
But a large part of the process needs to come from your side as well. You need to ask whether you are so desperate for a loan that you are choosing an option that will only make things worse. Ultimately, if you are simply kicking the can down the road, your business will end up collapsing regardless of whether you can keep it open another month or so. You will only end up with more debt.
Times are tough, and predatory lenders come out of the woodwork during crises. Watch out for high interest loans. However, this does not mean you should avoid Californian online lenders entirely. You may find a great lender which provides your business exactly what it needs to stay afloat.
