Due to COVID-19, finding small business loans is more important than ever for business owners. However, the global economic crisis has also made lenders extremely wary. In fact, small business financing has all but stopped worldwide. There are government-backed lending programs and some lines of credit and loans offered by leading banks. However, those are limited and have rather stringent eligibility requirements.

Simply put, most small business finance providers have stopped with loan originations, which is typical in response to an economic recession. However, this doesn’t change the fact that businesses and entrepreneurs need money. In this necessity, they are often pushed to look for financing from unreliable and outright predatory lenders. Therefore, it’s essential to learn how to identify between a good alternative financing provider and one that should be avoided.

The State of Small Business Loans During the Pandemic

The COVID-19 pandemic has impacted the global economy in many ways – the blow has been so profound that it has touched every business. Small businesses are more vulnerable to such problems due to their highly limited cashflow. Therefore, they are among those affected the most. At this time, securing small business finance is essential for the survival of more than 50% of SMEs.

However, it’s almost impossible to do now because lenders are also affected by the crisis. Small business loan providers take higher risks, especially when financing startups. During these times of great economic turmoil, risks increase due to difficulties of SMEs in keeping up with payments.

With COVID-19, small businesses’ cash flow may have stopped completely. Therefore, businesses may struggle greatly in paying off their debts. While big financing institutions such as top banks and credit unions have resources to minimize their financial impact, alternative financing providers may not have the capital for it. Therefore, they may have completely stopped loan originations to minimize their risks.

That said, it isn’t impossible for SMEs to get financing. There are specialized government programs offering different types of loans and grants. However, many of them are currently focused on paycheck protection. This means even if you do get financing, you may be restricted in how to use them.

Therefore, small business owners must look for alternative financing providers. Fortunately, there are still some fast small business loans you could get. They mostly come from bigger, and therefore, more stable alternative lenders.

Alternative Small Business Finance: Who to Trust

It is possible to find trustworthy alternative lenders. Usually, going for the industry’s top companies is the safest route. Currently, leaders of small business loans are Loans Canada, Borrowell, OnDeck, and Lending Loop.

When looking at these companies, you can see what makes them reliable. For one, they are certified and transparent about their terms. They also have a very good standing with customers, which you can verify online. Therefore, it is essential to research a lender’s background and their customer reviews before deciding on them.

However, it’s also important to understand that these lenders have some vices. The main cons of using alternative small business loans include:

High Interest Rates

Small business finance coming from alternative lenders tend to have higher interest rates, ranging from 3% to nearly 200% APR. These rates differ greatly depending on the provider and terms of the loan. You should use specialized online calculators to determine how much the loan will cost you over time.

Also, some lenders charge black-market rates; Being caught in this type of loan might break your business. To avoid such problems, make sure to study the contract in detail. You will need to find out the exact rate and other “hidden” costs involved. You will also need to check the contract for any loopholes; this could be in the form of a clause that increases interest to unreasonable heights if you delay a payment.

Inflexible and Restrictive Terms

Another reason why higher interest rates can be an issue is that the repayment terms are often restrictive. For example, it’s common that these loans cannot be paid early. Therefore, you will be contractually obligated to pay an exorbitant amount of interest. As such, this particular loan will be a bad choice for short-term financing.

Again, you should study the offer in detail in order to be safe. Terms you should look out for include restrictions on repayment schedules as well as penalties.

Certification

Unfortunately, the alternative small business finance industry is not well-regulated. Therefore, when you take this type of loan, you may not have the legal protections you would have when dealing with a traditional bank. This makes alternative loans risky.

You should always check the lender’s certifications. These companies might not be obliged by the law to be public or audited. You can see the list of the company’s certificates on its website or in the Terms and Conditions section. Study those carefully and research the authorities that issued these certifications.

Quite often, small business loan providers will be certified by authorities of several countries. However, this doesn’t mean that they are considered legal in your country. You will need to research which certificates and licenses your country recognizes for online lenders. Then, make sure that the lender’s licensing is up to date.

Note that the majority of alternative small business finance providers are online-based. Therefore, you should also check cybersecurity certificates that verify the safety of your personal data. Check the Terms and Conditions for whether the company can sell customer’s personal info to third parties. Even if your bank account details are safe, the lender might still sell your information for marketing research purposes.

Bottom Line: Small Business Finance Challenges in the Post-COVID-19 World

Small business financing is currently extremely strained due to the global economic crisis. Unfortunately, it’s impossible to predict when exactly the situation will change for the better. It took nearly a decade for small business loans to become easily available after the recession in 2008. Therefore, business owners today should use every opportunity to save money while looking for alternative financing with reasonable terms. One should take the time to research every option and accept that some loans will be less than favorable. That’s why it’s essential to only use certified small business finance providers with good reputations.