Are Online Small Business Loans Safe?

By Jess Harris

If you run a small business, the ability to evaluate commercial or business financing options is essential. At some point your business will probably reach a critical juncture when it will need a cash infusion–whether it’s to help cover operations during a lean period or to fund a growth initiative to take your business to the next level. When borrowing money is the only choice, startups and fledgling businesses, unfortunately, have historically been left with few options.

Thanks to the advent of online lending, small businesses today have an alternative for borrowing money that is convenient and quick. However, before doing business with an online lender, it's important to ascertain whether the lender is legitimate and if your business's identity will be in safe hands.

Identity theft costs victims billions of dollars each year, and cash-strapped business owners have become major targets for cyber thieves and fraudsters. The good news, however, is that the advance of fintech has made online lending safer. Here are some basic facts you need to learn about online lending so you know which lenders are legitimate.

How to identify scammers and fraudsters

The number of scams targeting business owners’ money or their identities has increased significantly over the last few years. In most cases, a scam will find its business owner victim via an unsolicited email or text, or a malware ad that pops up on a web page.

The best defense against any type of scam is to apply the “if it sounds too good to be true, it probably is” smell test. Also, being aware of the different ways cyber thieves and fraudsters operate makes them easier to spot. These are some of the more common red flags business owners may encounter:

Upfront fees. Loan brokers work to match business owners with lenders who can best meet their needs, and for that, they are paid fees or commissions by the lenders. If you are ever approached by a loan broker, be it online or on the phone, who asks for an upfront fee as a registration or credit check fee, a down payment, or any other financial prerequisite, walk away. This is not a legitimate loan broker. Lenders may charge a loan fee, but that’s only after the loan is approved.

No physical address. Even though you will deal with online lenders online, legitimate lenders have physical addresses. Before engaging in any conversation with a lender representative, scour the website for information about the company, including its physical address, its history, and its leadership team. Always verify that the address is a legitimate address because many online lending scammers operate outside of the United States. Never accept a P.O. box as a legitimate address.

Cash advance loans. Some business owners may be tempted with offers of $2,500 deposited in their accounts within 24 hours–no application, no credit check, and no waiting–because they know they can pay the amount off within a short period of time. But, it’s not the sky high fees or rates they will pay that should be their primary concern; it’s the fact that many cash advance operators belong to a nationwide or worldwide network of lenders. Once you provide your personal information to one, it will likely spread through the network, and there is no assurance it won’t be sold to other types of predators.

What to look for in a legitimate online lender

If you are considering an offer from an online lender, there are several things, in addition to a physical address, you should look for before providing any personal or professional information. The good news is that the development of financial technology has made it easier for legitimate lenders to protect your information–and for business owners to identify legitimate online lenders. Things to look for include:

Strong encryption and security protocols. The sites of legitimate online lenders use the highest level encryption to protect your information on both ends of the transaction along with Transport Layer Security (TLS) protocol to ensure it is securely sent. On any website you intend to provide sensitive information, make sure the URL in the address box starts with “https”, not merely “http”. The “s” signifies it is a secure website. You can also ensure the a website has been certified secure by looking for a security certificate from a company like Verisign.

Website background check. You can conduct a background check of a website by searching the “WHOIS" database at NetworkSolutions.com. There you can find out when the website was launched and who owns it. If the website is relatively new, it could be a red flag, requiring further research.

Check out complaints. In your search engine, type the word “complaints” next to the name of the company. Companies with few complaints may not be a problem, but if the complaints far outnumber positive reviews, it is a major red flag. Checking the Better Business Bureau (BBB) site can also reveal a pattern of complaints. If the company has no BBB profile, you should probably just move on.

Platform lenders. Platform lenders are a relatively new type of online lender, and they are pioneering ways for business owners to obtain loans online. Instead of evaluating a business just by its credit score, platform lenders tend to use more innovative, flexible, and data-driven methods of evaluating creditworthiness–such as looking at the company's social media activity and online sales receipts. They also require business owners to provide valid proof that their companies are legitimate and creditworthy. Even if a business is new and doesn't have a credit history, platform lenders may be able to issue loans, even when traditional banks do not.

Unlike interest-heavy cash advances, platform lenders often charge interest and fees that are more affordable, potentially more so than a credit card. Although the charges depend on the loan application and specific financial situation, platform lenders are often able to fill the gap for many business owners who need loans but cannot find an adequate deal from the traditional model of small business lending.

You can find platform lenders online, but before choosing a platform lender, be sure to do your research and weigh the various advantages of different lenders and loan offers.

Do your due diligence

Business owners looking for an online loan need to exercise thorough due diligence before providing any personal information. The good news for small businesses is the growth of online lending does offer a source of cash when it is needed most, and there are a number of legitimate and reputable online lenders from which to choose. The bad news is unscrupulous lenders and scammers are growing more relentless in their efforts to take advantage of vulnerable, cash-strapped business owners who aren’t aware of their options.

Luckily, financial technology has made it easier for business owners to assess how legitimate lenders are–and for lenders to quickly determine the creditworthiness of businesses.