What’s hidden in the fine print from online lenders?
Mar 17, 2020
When you’re looking to improve cashflow, whether it’s to meet overhead, payroll and other business expenses, you need it to happen fast. To capitalize on this urgency and through advances in financial technology, there has been an emergence of online financing companies that promise credit line approval in as little as 5 minutes. This is achieved by giving these companies full access to your bank account. They verify several things about your account through automation and then provide you the amount you can draw. They also retain that access to your account. The process sounds fast and easy, but what are you really giving up by going through this automated process?
At Catalyst Financial, we’ve helped our customers finance their business through accounts receivable financing(factoring) for more than 25 years. Lately, we’ve seen an increase in companies that have turned to us with after realizing these online lenders are employing confusing and misleading tactics that are tying up assets.
If you are considering an online lender to provide fast capital, here are a few questions you should ask first.
1. How much capital can you access?
If you are going to commit to an online lender, you need to ensure that you can actually get access to the amount of money you need. While some marketing claims include big numbers, in practice, these companies often severely limit the amount of money your business can access. Also, we’ve talked to companies who were initially approved for a capital amount, only to have it quickly retracted.
2. What is the actual rate?
When you first get drawn in through the digital ads, rates might appear manageable. However, it is not uncommon for rates to change quickly, and for undisclosed fees to unexpectedly hit your account. Ensure you read all the details of the contract to see how and when rates can change. Look into reviews about the specific lender you are working with and read hidden reviews on consumer websites, not just the marketing reviews on their site. Unfortunately, you’ll often find many stories of deceptive rates. The rates on the websites can sometimes be for 6 months, not for a year so rates are double what they appear. Make sure to really understand the APR in practice.
3. Am I locked into this deal?
There are two ways to think about being locked in. One – is there a requirement for you to factor or finance more than just the invoices that you want. And two – does this type of loan encumber your business assets. We’ve seen companies enter into this type of agreement and then not be able to get out because the finance company filed a blanket UCC on all of their business assets.
4. Is my information secure?
The company you’ve set up credit with now has access to your bank account and can view personal information and make drafts without warning. While this is convenient during the vetting and initial deposit, it can leave you vulnerable when rates change quickly and draws happen without prior notice. Ask specifically about when they can make drafts and how you can revoke access to your accounts.
5. Can I get a person on the phone?
The promise of fast money when you really need it can bring anyone to make questionable decisions. A few clicks and a nicely designed questionnaire away from a solution to your problems seems great on the surface. However, financing often leads to questions. Repayment terms can be confusing. When it’s the financial health of your business, can you get more than a 1-800 number and a general support email address to help you navigate your questions? Can you get a person on the phone who knows your business and knows what your pain points are? As we think back through the companies we’ve worked with over the decades, almost everyone has required a conversation when something didn’t go as planned. No matter how you decide to get financing for your business, we think transparency and a consultative partnership are the two most important things to consider.
6. When a crisis hits, how will they handle it?
No one can predict when a hurricane, especially one like Harvey is going to hit. And certainly no one could anticipate something like the COVID-19 pandemic. But your financial partners, at a minimum, should always commit to being accessible and communicating openly. In the last few weeks, we have heard terrible stories of online lenders being inaccessible to the businesses that they finance. Funding has been pulled with no notice and businesses are left scrambling, even those that have never had a late payment and have sales holding steady during this time. This time is helping us all see that we need partners who we can trust during a crisis; or who we can at least get to answer an email or phone call.
Traditional factoring with a company like Catalyst can still be achieved very quickly and easily; usually in 24-48 hours. The big difference is that you’ll have an account representative who knows your business and can answer your questions quickly. We think that technological advancements in our field are important, but they shouldn’t come at a cost of abandoning the human touch. When it’s your business at stake, you want someone to call when something challenging is happening. Not everything should be determined by an algorithm.
If you are looking for the best option for finding capital for your business, give us a call and let one of our account representatives walk you through your options. There is a place for every type of financing, and we’ll help you find what’s best for your business.
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