In recent times, many FinTech (financial technology) start ups have sprouted up across the globe, hopping onto the bandwagon of technological advancement to use online platforms as a tool to reach out to businesses that have been underserved by the banks. The usage of technology to disrupt traditional banking seems to have become a goal of the FinTech space. Small business owners who need financing are now able to bypass the banks and secure funds through an alternative financier online.
While most online financing platforms offer short term bullet loans at rates slightly higher than the banks, always be on the lookout for the rare few who may be able to structure and offer more attractive and cost effective financing terms. Assuming conditions equal, a business loan that has a longer repayment period, with low interest rates, will always provide for better cash flows, as monthly repayments will be less. The issue with high interest bearing, short-term loans, is that the slightest hiccup in cash flows could turn your small business dream into a financial nightmare. Therefore, to help business owners who are not already aware, here are a few pointers to help make the right choice, as well as a few pointers to ensure that your chances of qualifying are better.
1. Straighten Out Your Accounts
Before going out to seek for funding, it is essential to get your business’ accounts in proper order. The financial accounts are the backbone of a company. It will help lenders to determine the cash flow strength of the business, which in turn, determines the borrowing limit that your company will qualify for. An accountant could do it for you easily. If you do not have access to an accountant, there are also a considerable number of free IT programs in the market that could can help you to do up your accounts.
2. Reduce Debt Exposure
If you are in debt to a lender that is charging above the market average, or if you are high up to your neck in debts, be sure to clear off all that debt before approaching another financier. If you are unable to clear off everything, at least reduce the outstanding amount by a significant margin. If you are able to get your company qualified for a loan from a bank or institutional financier, you may then be able to consolidate and refinance previous costly loans. Where most business loans from the banks are long-term, low interest loans, you will effectively be able to trim off a large portion from your monthly repayments. Since the uprise of FinTech firms, many online marketplaces that offer small business loans have sprouted up across the globe, with each startup being seemingly faster than the one before in terms of processing time. Along with being on the financing end, many of these online platforms also function as a brokerage that connects small businesses to ideal lenders, making them a one stop market place for all business financing needs.
3. Knowledge of Products
The lack of product knowledge can sometimes turn out to be a very costly problem. It is absolutely imperative for small business owners to know what products potential lenders have to offer. By doing some basic research, you can effectively prevent any possibility of being cheated. In fact, you should request for a meet up before committing to any offer. You want a financier that is honest and transparent, that charges reasonable rates with decent tenures of up to 5 years, has efficient customer service, and is verified with the proper licenses. Look out for online reviews on sites like TrustPilot, or ask a round for reviews from your circle of contacts. In a country like Singapore, if absolutely unsure, you can approach a corporate financialcing consultancy like Capable Loans or Fullerton FinTech, who will be able to provide you with all the information you need. More than that, they will even help you to structure and syndicate for the most efficient and appropriate financing facilities.
4. Be Wary of Loan Promotions that are Too Attractive
Other than the occasional promotion where interest rates are slightly lower than usual, genuine financiers will almost always have consistently reasonable rates with longer tenures. Whenever you see an attractive deal, there is definitely no harm in finding out more, however, one should always remain skeptical. If the interest rates are too low, always look out for the processing fees. There are many lenders who showcase very low rates, but end up charging extravagant processing fees.
5. Know Your Numbers
Dishonest lenders have a habit of camouflaging their pricing terns with misleading information that will hide their actual Annual Percentage Rate (APR). They tend to use terms like “rate,” or “cost”, without actually listing their interest rates clearly. As an example, the use of a general term like “factor rate” to describe a borrower’s 15% interest rate, could actually turn out to be an effective 50% of interest rates! For good knowledge, always remember that the APR of any borrowing should only include the interest rates, processing fees, and the tenure of the loan. Having an estimated reasonable figure in mind could save you from the possibility of being overcharged. Therefore, always ask for the APR of the loan, and if a financier seems unwilling to disclose that information, tread carefully.
6. Pay attention to fees and other costs.
Given that the processing fees are an essential part of the Annual Percentage Rate calculation, a financier should always be willing to be open about their processing fees. If you meet a financier who is not open about their processing fees, then something may be wrong. If the Relationship Manager is unsure, request for them to check and get back to you with a definite answer. Always ask about early redemption penalties and the procedure for executing an early redemption of a loan. As a basic rule of thumbs, always read through a contract or agreement before putting a signature on it. If any clause or point in the agreement is unclear, ask the relationship manager to clarifications.
Finally, always bear in mind that the point of a business loan should always be for business growth, cash flow for daily operations, or simply to tide over a dry spell. A business loan should never hold the potential to crush your business. It is also fortunate that in a country like Singapore, all financiers are regulated by the government, which makes it a little more difficult for financiers to overcharge or cheat. Nevertheless, it never hurts to be a little more cautious and prudent with the finances of your business.