Online lenders offer a faster lifeline to small businesses
Online lenders have two advantages over banks: internally developed lending algorithms and models that they claim allow them to operate profitably in a market traditionally considered quite risky, and fewer regulatory constraints. Because these companies largely work outside of the banking system, the new online marketplace is currently “falling through the cracks” for federal regulators, Ms. Mills said. (She says that could eventually change if the market grows enough to catch the attention of lawmakers.)
This means businesses can get away with rates that are sometimes much higher than traditional lenders.
Fundbox, for example, advances money for 12 weeks and collects its repayment in weekly installments automatically debited from the borrower’s bank account. Its fees vary depending on the risk of the loan, but typical fees for a $5,000 bill advance would be in the range of $243 to $343, spread over the term of the loan. (If a loan is prepaid, before the 12 weeks are up, the remaining fees are waived.) This translates to an APR of 38-54%.
Mr. Shinar, the founder of Fundbox, thinks that metrics like annual rates aren’t the right way to look at his company’s service. “We don’t want to be on loan,” he said. “That’s not the right financial discipline for business owners.”
He sees Fundbox advances as a short-term way to smooth out the often erratic cash flow of small businesses, which sometimes need capital immediately for projects they’ll be paid for later. Because the cost of the advance is clearly displayed upfront – click on an invoice you plan to borrow from, and a pop-up window displays the exact Fundbox fee and each weekly repayment installment – it considers the The company’s pricing is more transparent than that of other loan options, like credit cards, which may offer lower rates.
Some customers also see it that way. “I’m not too concerned about pricing,” said Ross R. Mason, the founder of Motion Media Solutions, a video production company in Addison, Texas. “The costs are very clear and the cash flow is perfect. I can’t imagine how it could be done better.
For him, the biggest advantage of Fundbox is its direct integration with his QuickBooks online account. “Everything is automatic and immediate, so we don’t have to spend time on extra paperwork and accounting,” he said. “We know the money will be coming in soon from our customers, so we won’t be overwhelmed, and we pay attention to the sales every week.”