Where online lending was:
Fintech breakthroughs in the last decade has revolutionized the way in which lending is performed, allowing both consumers and small businesses to quickly draw loans through online lending services. Before online lending, small business financing consisted of going to a bank and working through a slow and complicated process. Acquiring a small business loan through the bank is both cumbersome and difficult to get because of one word – risk. With having to be 95% sure that the business requesting a loan wont default, you can understand why banks extensively audit small businesses; they look into the small businesses: industry, age, profitability, credit history, owner guarantee, lawsuits, tax liability, owner’s equity, loan use, and receivable concentration. Fortunately, advances in fintech have made alternative financing options possible.
In 2007, Fintech advances made online lending possible, advances which provide businesses with the opportunity to bypass a bank and quickly finance through specialized lending companies. Through online lending, owners can now get small business loans quickly without going through the banking bureaucracy; you can now apply and get a same day loan without even leaving your living room! Though a great opportunity for small businesses, like most things, there were some serious pitfalls in the beginning. The pioneers of online lending were not at all transparent with fees to begin with. High penalty fees, monthly accruing fees, and pulling money directly from bank accounts were among the unpleasant surprises experienced by small business owners.
Where online lending is going:
Due to backlash stemming from hidden fees, the industry of online lending, and all financing industries, is moving in the direction of full transparency. Prompted by the 2008 financial crisis, the Dodd-Frank Wall Street Reform Act (2010) expanded Transparency in Lending Act was passed to protect consumers from lenders. You’re probably asking yourself why this important to small business owners? The Transparency in Lending Act is important because it will make finding the cheapest small business loan for your company easy, upfront, fast, and trustworthy. As the Transparency in Lending Act requirements expand from only applying to consumers into alternative lending for small businesses, lenders will change their business model for the better—Law makers are pushing forward to expand requirements to apply to businesses. The Transparency in Online Lending Act now requires lenders to get a signed agreement acknowledging a full understanding of the following:
APR – APR shows a yearly percent cost of the loan credit, including all fees, costs, and rates; unlike presenting an interest rate, which only shows annual cost of the loan.
Finance Charge – The finance charge is the dollar amount that your loan credit will cost you throughout a loan period. The finance charge is an aggregated cost which includes transaction fees, maintenance fees, and late charges.
Amount Financed – The amount financed is the total dollar amount of credit loaned out to you.
Total Payments – Total payments is the full dollar amount in expenses and fees after the loan is paid back.
Alternative lending response:
Though online lending services are not currently held liable to disclose fees to businesses, transparency is paramount to the success in any field of financing. 100% transparency with fees and charges, even though it’s not at the moment required, gives lenders both customer trust and a to date platform to work with when the Truth in Lending Act expands and applies to small business loans… as well as helping local businesses thrive.
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