20 FABRICARE categories of loans—working capital or lines of credit, for example—that a commercial bank might shun. All these advantages make online platforms attractive. So does another one: expertise. “Often alternative lenders are savvier than commercial banks which often experience great turnover in their lending officers, many of whom can be inexperienced,” said Holt. “Additionally, nonbank lenders sometimes specialize in certain types of loans or in specific industries, and their greater knowledgeable can translate into more flexible lending policies.” THE DOWNSIDE Of course, alternative lenders aren’t without drawbacks—not the least of which is cost. “Fees charged by these platforms are high, often ranging from three to seven percent of the loan,” said Vrancik. When you add those fees to the interest rate charged, she said, the loan can be quite expensive, resulting in an Annual Percentage Rate (APR) of up to 40 percent or more. “The weaker the credit score and the financial condition of the borrower, the higher the cost of funds and the shorter the terms of the loan.” Funding from nonbank lenders also carries risks that business owners may not fully appreciate, said Vrancik. “One risk arises from the fact that the financial analysis required by nonbank lenders is often not as exacting as that of traditional banks. As a result the financing can end up being a little too easy, and the small business owner can be tempted to take on more debt than is prudent. That can spell trouble for small businesses who are often under very tight cash constraints.” LOOK TWICE The bottom line is to have a firm grasp on your ability to meet the mandated repayment schedule. “If you cannot repay your loan quickly, then nonbank lenders will be the bane of your existence,” cautions Holt. “They often move faster to collect their debts than the large, cumbersome banks, and that can ruin your credit. While they sometimes will restructure your loan, that will seldom be to your advantage. Keep in mind that even though they want you to succeed, they have their own private investors to answer to.” A second risk arises from the distance between you and the nonbank lender. The organization providing the money probably has no knowledge of how your business operates. “Without a working relationship with the debt holders, you have limited flexibility in renegotiating terms down the road,” said Vrancik. “In contrast, local bankers will often be motivated to see your business succeed, especially if they anticipate providing you with services in addition to the current loan. For example, you might be able to negotiate an extension of payments or a waiver of a provision for a couple of months until a big contract comes in.” Finally, bear in mind that nonbank lenders are not subject to many of the same regulations as traditional lenders. That raises questions, said Vrancik, about what they do with your business information. “I would be concerned about offering sensitive information online, or providing a direct link to your bank account, without being familiar with a lending platform’s security provisions.” DUE DILIGENCE As the above comments suggest, a lack of regulation means an absence of standardization in lending continued from page 19 continued on page 21 COVER FOCUS