online lenders should be checked before signing a dodgy deal

Written by The ReReport

IN the aftermath of the banking Royal Commission, and the subsequent regulatory crackdown on lending practices, Australia”™s major banks have gone into their lending shells.Credit has dried up for both business and personal borrowers. As we forecast a few months ago, we’re in the midst of a good old fashioned credit squeeze, which is adding to the slowdown in property prices and causing headaches for small business wanting to expand.The big winners are the non-bank lenders that don’t face the same regulatory hurdles and can provide quick, almost-instant decisions and quick cash.BANKING: Why the Big Four banks shares pay out more than depositsBORROWING: Salary up but bank lends $235k lessBut what cost is convenience? Some of these “sexy” new lenders are charging exorbitant interest rates of up to 38 per cent (yes, an annualised interest rate of a whopping 38 per cent) for that ease of access.Yes, they are an alternative to the banks but borrowers need to know what they’re getting themselves in for. To peel back the slick facade and understand the details. Most of these lenders will want access to your accounting programs to understand everything about your business.LAST RESORTIt’s up to you to understand as much as you can about them and the loan conditions they’re imposing.They should only ever be seen as a very short term, last resort option with a good plan to get of them as quickly as possible.If you Google business loans, the search results are dominated by non-bank lenders using slogans like “apply in minutes, approved in 24 hours”, “most loans approved” and “flexible, cash flow friendly repayments”.Tmedia_cameraDavid and Libby Koch say borrowers should be wary of catchy slogans from lenders.hese Fintech non-bank lenders are being applauded for providing more competition for the banks with the logic that increased competition will reduce the cost of borrowing for small business. That certainly isn’t happening.While they’re being painted as the white knights of small business lending, we’re wondering whether they are actually the wolf in sheep’s clothing.A quick check of the comparison website highlights the problem with business loans.HARD TO COMPAREBusiness loan interest rates from traditional banks range from 5.13 per cent per annum secured against property through to 13 per cent per annum unsecured with monthly repayments. The new lending environment means it is increasingly difficult to qualify for an unsecured loan and that’s what is forcing small business to alternatives.Using the Mozo website, you find these non-bank lenders are reticent to provide full loan details which can easily be compared with each other. For example, rarely do they show a straight annual comparative interest rate, like the banks are compelled to do.There are a lot of alternatives on offer like Ondeck, Moula, Prospa, GetCapital, SoftCap, Lets take a look at two of the better known providers which reflect what we’re talking about.media_cameraWatch out for lending wolves. Illustration: Terry PontikosNon-bank lender Moula has a listed interest rate of 1 per cent per fortnight, not annual, with no fees. Now 1 per cent looks pretty attractive until you do the maths based on fortnightly calculations and repayments also fortnightly. The actual annual interest (that you can compare with bank rates) is over 30 per cent.Another well known non-bank lender, Prospa, doesn’t advertise an interest rate but does charge an upfront fee of 0.05-1 per cent and repayments weekly. To help compare non-bank lenders, Mozo has calculated a $10,000 business loan from Prospa would attract $1500 in interest after just 6 months.That works out, including upfront fees and weekly repayments, at an interest rate of well over 30 per cent a year. In fact, in a recent report to financial markets, Prospa claimed its average annual interest rate to borrowers was 38 per cent.OTHER OPTIONSFor many small business owners with a dire cash flow problem, these online non-bank lenders are an easy fix. But, in consultation with your accountant or bookkeeper, there are other options which could be considered:• Invoice factoring is a great way to generate a quick hit of cash. A finance company basically buys all a business’s outstanding invoices. It will deduct a fee of 1.5-5 per cent and then pay 85 per cent of the invoices immediately. The remaining amount will be paid when the invoices are actually paid. Effectively you’re getting your invoices paid early, for a fee, which will hopefully ease short term cash flow issues.• Organise a personal loan. Not ideal, but for amounts up to $20,000-30,000 an option could be organising a personal loan and then lending it back to the business. Approach credit unions and some of the peer-to-peer lenders which offer small loans at interest rates of 9-13 per cent a year. A key part of applying for a loan is your credit rating. These organisations will check your credit history which, if good, will not only increase the chances of approval but also encourage them to charge an attractive interest rate.• Work with your bank Yes, getting access to credit from banks is tougher but, if you can’t get approval, work with them to see what they need to make it happen. Just don’t accept a knock back. It could be there is a mistake in the credit history you weren’t aware of and can be rectified.Most banks want to work with their business customers to grow their account. They tell us the more ongoing information they receive from a customer, the comfortable they are with helping the business and likely to extend credit.Originally published as Beware of online lending rip-offs

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