by Jerry Ernst (As seen in June’s issue of InBusiness magazine.)
It’s a common situation. You needed a loan to grow your business and, since banks need a substantial amount of paperwork you didn’t have time to produce, you went with an online loan.
The loan application only took about twenty minutes, with minimal fuss and paperwork. You weren’t a fan of the automatic payments, but it reduced the interest rate and they even approved you for a bigger loan than you asked for. You signed the contract and spent the funds.
Trouble hit like an oncoming haboob.
Payments were pulled from your account once a week, not once a month, and they had full access to your bank account. You couldn’t stop payments without changing checking accounts and violating the contract you hadn’t read closely enough, and they weren’t willing to change the terms – even though they weren’t the same terms you’d thought you were getting.
Online lenders aren’t held to the same laws, regulations and compliance oversight that banks follow, and it comes as a nasty surprise to many.
Online lenders aren’t banks, so Truth in Lending disclosure laws designed to protect borrowers don’t apply. They have zero government regulation and compliance oversight to keep their interest rates and fees reasonable. Plus, if a borrower doesn’t read their contract closely enough or notice when it omits critical details, only to find out later that its terms don’t match their expectations, there’s little recourse available.
Regulation is coming, but until that happens, abuse is high. Online loans might be the path of least resistance, but that convenience has a cost.
Additionally, since most online loan approvals are software-based decisions with no analytics of the business’ viability and no customer relationship, the borrower pays higher rates to cover the lender’s high volume of losses – sometimes as high as 100 percent hidden within the contract fine print.
Trust is dangerous in an online world where customers are just a faceless transaction. There’s comfort and protection knowing banks follow specific rules, and are held closely to standards with pathways to rectify problems.
Is a faster loan process worth giving that up?
Local banks might require more resources and a bit more time, sure, but the value you gain is worth every minute spent. Proper underwriting is a chance for your banker to get to know you, delivering something called “right finance.” Only a banker can help you understand if your loan is enough to help you succeed or something that will push you into bankruptcy, and match capital to your goal in a way that makes the most sense. They consider total resources, not just the dollar amount being funded.
Even if you aren’t quite ready to seek a loan quite yet, creating a trustworthy banking relationship gives you a financial coach in your corner, poised to help whenever needed.
Jerry Ernst is president of Horizon Community Bank. Recently ranked as an Arizona Top 10 Lender by the U.S. Small Business Administration (SBA), Horizon Community Bank is a locally owned and operated bank with branches in Fort Mohave, Lake Havasu City, Mesa, Parker and Quartzsite.