Dear M & M: What do you think about the recent surge in online lenders and filling out online proposals?

– Jan

Dear Jan: Bottom line you probably will end up paying more for an online loan vs a traditional bank loan. Traditional bank or lender loan interest rates range from 4% to 13%. While online lending average interest rates can range from 7% to over 60%. On the other hand you probably will get a quicker response online. Many times you can compare rates from several sources immediately. According to biz2credit large banks approved 23% of funding requests in March, 2019 up two tenths of a percent from February, 2019.

Small banks granted 48.7 % of the funding requests last month, down two tenths of a per cent from 48.9% in February, 2019. Alternative lenders (merchant cash advance companies, factors and other non-bank lenders loan approval rates dipped to 60.7% from 60.8% in February, 2019. While credit union approval rates in March, 2019 approved 42% of the loan applications it was slightly down from the 42.1% rate in February, 2019. Traditional loans generally require a credit score of 680 or above. While online lending can go as low as 500. Naturally, the lower the credit score the more risk the lender is taking on. So they want to be rewarded more for taking on the higher risk, therefore interest rates will go up.

Before the rise in online lending banks were the primary source for most business loans. Banks qualified borrowers based on personal assets, business credit, revenue, profitability, collateral and a lot of other factors like debt to equity ratios. Online lending surged to serve business owners that couldn’t possibly consider traditional banking or financing. Offering more lenient requirements online lead to much higher interest rates to be charged to occur to cover losses incurred by taking on the more risky loans.

Keep in mind your rates and terms whether online or with your local bank, credit union or traditional lender will vary depending on the strength of your application and the requirements of whatever lender you are pursuing. Always when doing anything online beware of scams. If it is too good to be true it probably isn’t true.

ASK M&M is prepared and submitted by Mark Schmitt, director of the Small Business Development Center at Cochise College; and Mignonne Hollis, executive director at the Arizona Economic Development Foundation. To ask your questions: Call the Small Business Development Center (SBDC) at Cochise College (520) 515-5478 or email schmittm@cochise.edu or contact the Arizona Regional’ Economic Development Foundation at (520) 458-6948 or email hollism@aredf.org; www.aredf.org.