Of all the different types of financing used by business owners, one of the most prevalent is short-term working capital. The best way to cover these needs is with a bank line of credit. The difficulty with that, especially for early-stage companies (often less than two years old), is that often their working capital needs are not large enough to make the efforts worthwhile for a bank, plus from the fact that banks in general often already have a bank built. -biased against small businesses. And with working capital loans, banks have to spend much more time than any longer-term loan. If you have a 90 day loan, for example, it will either be paid off (paperwork), or if not paid off, a new loan will be created, probably a different interest rate and term, new notes to sign, etc. (much more paperwork).

To fill this void and take advantage of the tremendous computing power available today, more and more non-bank lenders have emerged to serve the small business market. That computing power allows these lenders to make decisions almost immediately after the borrower applies. Lenders take advantage of the vast amount of data available about us on the internet and create algorithms that can instantly analyze it to make credit decisions. Things like credit scores, utility payments, insurance claims, mobile phone data, social media posts, Yelp (and other) reviews, and more. This analytical speed often means that credit decisions based on algorithms created by the lender can be made in minutes, and in some cases makes funds available the same day. But to take advantage of this speed, you are going to pay for it. Much.

These are just a few examples using only financing costs from a few different working capital lenders. There are many other factors that come into play for the lender to decide the final introductory interest rate; things like time in business, credit score, loan amount and term (maximum time before payment is due) just to name a few. The examples:

• Lender A: 2.9% – 18.72% flat rate
• Lender B: 1.5% – 10% per month
• Lender C; 9.9% – 99%
• Lender D: 0.25% – 1-7% per week

There are two very important things you should come out with here:

1. Research, research, research. There is a wealth of information available on the Internet about online working capital lenders of all kinds. Learn all you can about all types, but especially working capital lenders. But if you’re starting to settle on one or two, you need to dig into the details of the terms. There could be asset requirements that would never occur to you unless you default on your loan and then find that the lender may liquidate some of your assets. Therefore, your investigation should be thorough if possible.
2. But I think the most important thing to understand is how working capital loans are designed to work. They are designed to be paid off in a very short period of time to cover certain costs incurred while you wait for payments on what you have sold. Think credit cards. Pay it in 30 days, without interest. But if you don’t pay it off by the end of the term, interest charges on unpaid balances kick in, and depending on how the lender calculates them, the costs can be significant.

Online working capital lenders provide an incredibly valuable service that banks can’t (or more likely) won’t. Just make sure you understand what you’re getting yourself into. Convenience can be expensive.