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Can Small Business Owners Trust Alternative Lenders?

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Stefan Schumacher

A major Businessweek article sent a cautionary signal to small business owners across the country last year — beware of hidden costs on loans from so-called “alternative lenders.”

Alternative lending is a booming industry, drawing millions from venture capitalists. Those investors apparently see the lucrative nature of the profits possible from the sometimes-murky loans.

In a recent SurePayroll Small Business Scorecard survey, we found that:

  • 41% said they do not trust alternative lenders.
  • 11% of small business owners have used alternative lenders.
  • 38% said they would consider using an alternative lender.

A particular problem, according to Businessweek, is the existence of loan brokers who attract the loans and tack on hefty commissions. Businessweek suggests that the process might not be healthy.

The concern is small businesses are being pushed towards expensive loans they may not be able to afford, with some even comparing it to rise in subprime mortgages leading up to the housing crisis.

Alternative lenders dispute the ominous tone of the Businessweek article. They said some of the examples are overblown and that reputable companies won't add extra fees in excess of 12 percent of the loan.

Also, of the small business owners that have used alternative lenders in the SurePayroll Scorecard survey, 84 percent reported having a positive experience and would use them again.

Whatever the truth is, the article is an important piece of information for small business owners who are considering using alternative lenders. They now are aware they need to be asking questions about the loan's costs. They might need to push hard for answers.

No matter how cash-strapped your business might be, it still pays to drive a hard bargain to find a lender with reasonable fees. Your business' return on investment might depend on it.