The Need For Transparent Small Business Financing

They say you need to spend money to make money. Unfortunately that’s a lesson that many small business owners learn the hard way, leaving them in need of a loan or line of credit. Although approval rates from small business loans have increased in the past couple of years, there are still many entrepreneurs who still can’t obtain the financing they require for their business.

A new study commissioned by peer to peer lender Lending Club found that 44% of business owners that wanted some sort of financing weren’t able to get it. This not only affects these small businesses but also impacts the economy as a whole with 55% of those same entrepreneurs saying that, if they could find financing, they’d hire at least one more employee. To put that into perspective, if each of those business owners hired just one person it would create over three million jobs and cut the U.S. unemployment rate by a staggering one-third.

Even for those business owners who can find financing, navigating their options and making a solid financial choice has proven to be a tall task. One major issue that has arisen is a lack of transparency when it comes to interest rates. The survey found that while 77% of entrepreneurs said that interest rate was the most important factor in choosing a loan, only 7% were able to correctly calculate the rate on a loan unless it was disclosed to them. Had they been shown the correct interest rate 83% said they wouldn’t have accepted the loan and continued looking for other options.

 

Luckily businesses do have more small business financing options now thanks in part to online lenders. In fact 61% of those business owners who planned to seek financing within the next year reported looking online for loans. These FinTech lenders often offer rates that are better than credit cards and are able to get capital to business owners quickly so they can purchase the goods and services they need.

Another option that entrepreneurs might consider is securing a business line of credit. Once business owners are approved for lines of credit they can access capital whenever they need it, giving them a greater peace of mind. On the other hand those looking to make a single large purchase might prefer a traditional fixed-rate term loan. Some online lenders now offer both options, including Lending Club which allows small business owners to borrow up to $300,000 either as a term loan or as a line of credit with rates starting at 5.9%.

Even with rising approval rates at traditional banks, many small businesses are still aching for financing in order to grow. While online financing has come to the rescue for many entrepreneurs, others are falling prey to opportunistic lenders that often hook them with loans that are costing more than they realize. With this in mind small business owners should be thorough when searching for a business loan or line or credit and demand transparency from their lenders. Doing so will not only help the small businesses of today but also grow the economy and spur the companies of tomorrow.

Author

Jonathan Dyer

I'm a small town guy living in Los Angeles looking to make solid financial decisions. I write for a number of finance websites, including HuffingtonPost and Business2Community. I founded DyerNews.com in 2015 to focus on personal finance and the emerging FinTech markets.

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