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 world, nearly all small business owners have 'shopped' banks, loan brokers, online lenders, loan platforms, affiliate websites, etc., simply to see what kind of financing options are available. As a matter of fact, you don't even have to go out and search for financing anymore, it's practically being thrown at you from every angle. From nonstop auto-dial 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, emails flooding your inbox; all promising the lowest rates, best terms, instant pre-approvals and millions of dollars in funding within minutes, simply for owning a business and 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 being offered as bribery to fill 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 cookie cutter, one-size-fits-all loan solutions 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 two outcomes:
1. Once your loan package is received by a lender, it goes into underwriting followed by a credit pull which will show all other lenders you've applied to. If one or two pop up, it's not really an issue. If many pop up, it immediately raises a red flag. Applying with multiple lenders over a long period of time or shotgunning a loan package to countless lenders all at once, basically appears as if you are searching for the largest loan amount possible, unable to qualify or unable to commit. If they feel you are non-committal, some lenders will try and lure you into a contract using teaser rates, which is where a ton of small business owners are getting burned right now. As it relates to shopping for the best "rate," we are seeing a lot of small business owners pass up legitimate funding offers, to accept a fake / teaser rate offer, only to have that offer skyrocket when it comes to signing the funding contract. Remember, not all lenders are created equal and many have questionable ethics, often times doing whatever it takes to get you to sign that funding contract.
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. Would you write a stranger a check for $100,000 if you couldn't take them seriously?
Keep in mind, your credit report shows all the lenders 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 loan applications make you appear desperate for a loan (regardless of whether you are or not). When lenders know you are shopping, it gives the appearance that something questionable may be going on, you don't meet minimal criteria or simply non-committal.
In the end, the trend of shopping for small business loans may have 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 often times offering all sorts of inaccurate small business lending advice from so-called 'experts' in order to sell these loans. Tons of small business owners are shopping rates & terms that often times don't even exist, clicking on banner ads for loan products they'll never qualify for - or may not even apply to their cash flow model, and committing to fake funding offers that they'll never get; sometimes passing up legitimate and obtainable funding offers in the mean time.
Don't forget, shopping on "rate" alone will not always give you the outcome you desire. Ever visited a travel website and compared the price of airplane tickets? As an example, if there's one plane ticket for $50.00 and another for $75.00, most people choose the cheaper ticket without looking at the big picture. Thinking you got a bargain, you get to the airport only to find out you you owe an additional $100.00, for taxes, airport fees, baggage, and the air you intend to breath on the plane. So you passed up a $75.00 ticket because it appeared more expensive, although now you're actually paying $150.00, which is double what you were trying to avoid in the first place. Same thing applies with small business loans. If you are shopping for the lowest rates and rates alone, make sure you know the difference between a factor rate, APR, and interest; and know how to calculate these mathematically. As tempting as it may be to simply look at the interest rate when comparing potential loan offers, it doesn’t give you the full picture. For example, one loan may have an attractively low interest rate, but if it is compounded daily or associated with a whole bunch of additional fees it may wind up being much more expensive than you originally thought. Given the amount and term of your loan, APR takes into account all of the costs associated with financing the loan and is the best metric to help you compare “apples-to-apples.”
Finally, it's important to remember that small business financing is meant to be an individual solution that fits your specific business, business model and goals. If you are being pitched loan products by someone who knows nothing about your business, cash flow model or goals, RUN! 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.