The trend of shopping small business loans may be more damaging than you realize.
If you own a small business, chances are you've probably looked into the myriad of financing options available to you. In today's online and digitally connected business world, nearly all small business owners have 'shopped' banks, loan brokers, online lenders, loan platforms, etc., simply to see what kind of financing options are being offered. Heck, you don't even have to go out and search for financing anymore, it's practically being thrown at you from every angle. From telemarketer solicitations, loan brokers harassing you, social media constantly in your face, postcards arriving in the mail, flyers landing on your desk, banner ads flooding your search engines, pop ups appearing on every website you visit and emails flooding your inbox. All promising the lowest rates, best terms and instant pre-approvals for hundreds of thousands of dollars simply for having a pulse! These days, you can't get away from all the small business loan offers if you tried.
While the options for a small business owner to obtain capital is plentiful, just like everything else in life, too much of a good thing isn't always a good thing. While the theory behind shopping small business loans to find the best rates and terms may sound like the prudent method, in reality you may actually be hurting, not helping your chances of finding the best possible financing options you are so desperately in search of. That's right, the more you shop for the "perfect" deal, the least favorable one you may wind up with.
With literally thousands of online lenders, affiliate websites, bloggers and millions of other sources offering financial advice for small businesses, coupled with the constant barrage of loan offers being thrown at anyone who has ever searched for a loan online, it may seem like the best option is to shop around. With the non-stop promotion of "free quotes," gift cards in return for filling out loan applications and web platforms being created for the purpose of having lenders fight for your business, small business owners have been led to believe that the more they shop for money, the better "deal" they will find. Nothing could be further from the truth! Not to mention, the shady business of pushing a one-size-fits-all loan solution onto small businesses with varying needs could be more damaging than anything else.
Regardless of whether you are looking for your first small business loan, stacking cash advances to stay afloat, or looking for a new lender after a bad experience, chances are that your online shopping could actually put you in an even worse position than before. Here's how:
When a lender receives a small business loan application from someone who is shopping, typically there are 2 outcomes:
1. If a lending company can see that you've applied on multiple occasions with multiple lenders, they will know that you are not committed to any specific company and will try to lure you into a contract using 'offers'. Keep in mind, many lenders work together or are connected in some fashion. So in essence, every time you pass your loan file around or submit another application, each lender already knows where the file has been and what was offered.
2. In some cases, lending companies may turn down applications due to the fact that they have received the same business' application too many times in the past without closing. Nobody likes their time wasted and a lot of effort goes into loan packaging and underwriting. If lenders know you are non-committal and just kicking tires, you will get declined before the file is even considered.
In addition, you must know that your credit report shows ALL the lending companies that you've applied to. Having a credit report that shows numerous inquiries by different lenders is a huge red flag and typically leads to outcomes #1 and #2. That is, not to mention, every time a lender pulls your credit report it can actually have a negative effect and drive your credit scores down.
Finally, all of this shopping can get you labelled as a "High Risk" applicant. The numerous credit inquiries, hard credit hits and small business lending applications make you appear desperate for a loan (regardless of whether you are or not). To the online lending companies, it appears as though you are trying to get the maximum loan amount and are either unable to qualify or unable to commit.
In the end, the trend of shopping for small business loans has inadvertently lead to business owners doing more harm than good. Lending platforms, affiliate websites and small business blogs are all looking to gain big money by steering small business owners into loans that may or may not be an appropriate fit for their business, and are offering all sorts of inaccurate small business lending advice from so-called 'experts' in order to sell these loans.
It is important to remember that small business financing is meant to be an individual solution that fits your specific business, business model and goals. Business loans are NOT meant to be bought, sold, or haggled over. So, before you start filling out countless applications and forwarding your financial information to anyone and everyone promising a "better rate," consider your business' complete financial standing, the purpose of the loan and just how 'shopping' for the best rate could negatively affect your credit standing and the future of your business.