In recent years, alternative lending has become an important tool for small business owners to access credit.

Such lenders, including Inc. 5000 companies OnDeck and Lending Club, spotted an opportunity following the great recession, when banks tightened their credit standards and essentially stopped lending to small business owners. And they’ve basically only increased their market share and marketing efforts ever since.

Now, according to this report on the Wall Street Journal, there are so many new alternative lenders, supported by the billions of dollars from venture capitalists, that they’re tripping over each other for customers. While that may seem like a good thing for business owners desperate for credit, it’s definitely a case of buyer beware.

Quite a few of the more established firms have been in the spotlight in recent months for questionable lending practices. And although they seem to be making efforts to address complaints, the same can’t be said necessarily for the new batch of lenders, where interest rates on loans can be exorbitant, and repayment terms extreme.

About 20 percent of small business owners turned to online lenders to secure loans through the first half of 2014, according to the New York Federal Reserve’s most recent online lending report. Other reports suggest that online lenders could soon capture up to 30 percent of small business borrowing needs.

And online lenders are approving loans for small business owners at a much faster pace than traditional credit sources. In July, such lenders approved 61 percent of loan request, compared to 49 percent for small banks, and just 22 percent for large banks, according to online lender Biz2Credit.

If you haven’t heard from one, don’t be surprised if you start getting mail for their products. Through July of 2015, these lenders reportedly sent out 156 million mail offers, more than double the amount sent out for the same time period in 2013.

Be careful before you bite. While your best bet is a bank loan, because the industry is highly regulated and the loans are cheaper, it definitely takes longer to secure that kind of financing. So if you go with an alternative lender, make sure you understand all the conditions of the loan. That includes the annual percentage rate, the repayment terms, and any initiation fees. It's also good to determine how reachable the company is via customer service channels. Finally, make sure you’re not taking out more loan than you need or can reasonably pay back. Some lenders also required daily repayments, and will debit those directly from your bank account. Make sure all of these things works for you.

Published on: Oct 2, 2015