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Start Your Business Startup Funding

Considering Alternative Lending? 6 Red Flags to Look For

Considering Alternative Lending? 6 Red Flags to Look For
Credit: Melpomene/Shutterstock

Big bank loans are hard to come by. Though the number of approvals has been increasing in recent years, new companies are often not even considered due to their lack of financial history. Even if you meet the rigorous credit standards and revenue minimums, the whole process still requires a lot of time and energy.

To avoid this hassle, businesses have been turning to alternative lenders, non-institutional companies that provide smaller, faster loans to business owners. The approval rates are much higher (64 percent, as opposed to about 20 percent for big banks, according to Inc.), and you could have your money in a matter of days, rather than weeks or months.

Sound too good to be true? It might be, if you don't choose your lender carefully. While many business lenders are trustworthy and reliable, there are plenty of others that could potentially ruin your business's bank account, credit score and reputation.  

"Not all loans are the same," said Jordan Niefeld, a CPA and certified financial planner with Raymond James & Associates. "Institutions make money by lending, and [borrowers can have] expensive bills and rack up interest because they didn't do their homework."

If you want to make sure you're signing with a reputable organization, here are six red flags to watch out for when evaluating potential alternative lenders. [7 Small Business Loan Myths Busted]

Their website isn't secure. This is Internet safety 101: Never send sensitive personal and financial information through an unsecured website. Hunter Stunzi, co-founder and president of business loan provider SnapCap, said that a site without a valid SSL certificate, which certifies that private information is transferred securely, is likely one that is out to steal your information. In the navigation bar, you should see "https" in the URL, along with a lock icon — this is a quick way to see if a site is secure, Stunzi said. He also advised checking the site through a program like Norton's Safe Web to make sure it's registered to a verified business.

You can't find the 'fine print' on their site. A legitimate lender should include their privacy policy, terms and conditions, and other legal disclosures somewhere on their website. Stunzi noted that these items will tell you how the lender plans to use your information before you provide it, and what you're agreeing to by using the website. If you can't find that information, you may be unwittingly consenting to your personal data being sold off to third parties, which could result in unnecessary and potentially harmful credit inquiries, he said.

They won't disclose the amortization schedule or full loan terms. One of the most important considerations of anyone looking to secure a loan is whether or not you'll be able to pay it back. The terms and amortization schedule of a loan will break down how interest accrues, what percentage of your payment goes toward it and whether there are any other fees associated with the loan. Niefeld said a reputable lender should be able to give you this information and fully explain what your loan is going to cost you over time, especially if you are late with your payments or don't make them.

"A lender or broker who is unwilling to disclose and define fees [is a red flag]," added Jim Salters, CEO of The Business Backer, a business lending and financial advisory firm. "You absolutely have the right to understand what you're paying and why you're paying it. If you feel your requests are being ignored or glazed over, I would find a new lending partner."

They don't have a paper trail. Any good lender will have some kind of information about themselves readily available online, such as a robust website, authentic customer reviews, a social media presence, etc. If you can't find anything to suggest that the company has legitimate, current customers, it might be best to reconsider that lender, Stunzi said. He also noted that "squeeze pages"-- contact forms that ask for a lot of personal details in order to obtain access to information about the company or its loans -- are a warning sign of a potential scam.

"A credible online lending website will provide details on its loan program and a way to learn more, including a valid working phone number," Stunzi told Business News Daily.

Niefeld advised asking a potential lender about the number of loans it currently services and whether loan financing is its primary business. This should give you an indicator of how reputable the company is, he said.

They want you to take out more money than you need. Normally, having access to more money than you need to get by is a good thing. However, when you're borrowing that money, it's important not to bite off more than you can chew. Salters cautioned against signing with a lender that wants you to agree to a larger loan amount than necessary for your business.

"If a lender or broker is pressuring you to take more money than you need, that is a clear sign to end the transaction," Salters said. "Larger deals mean larger commissions, while you can end up upside down in your payments."

They pressure you to sign an agreement right away. Taking out a loan, big or small, is a very serious financial commitment. Before you agree to anything, you should be able to ask the lender as many questions as you need to feel comfortable with the loan terms and payment schedule.

Stunzi warned business owners to walk away if a lending representative tries to rush you into signing the paperwork before giving you the opportunity to review everything. This is especially true if there are multiple loan options available to you: A good lender will act as an adviser and walk you through the pros and cons of each before you make a final decision, Salters said.

"People jump the gun and sign the papers without understanding what they're getting into," Niefeld added. "Really understand the loan and your responsibility as the borrower [before you sign]. Be a part of the plan — don't be 'sold' anything."

For more information on choosing the right type of small business loan, visit Business News Daily's guide here.

Nicole Fallon Taylor

Nicole received her Bachelor's degree in Media, Culture and Communication from New York University. She began freelancing for Business News Daily in 2010 and joined the team as a staff writer three years later. She currently serves as the assistant editor. Reach her by email, or follow her on Twitter.