Online Loans in California: Do I Apply Or Say Goodbye?

Online lenders, also known as alternative lenders, fintech or peer-to-peer lending, came into existence in 2006. Despite only accounting for about $5 billion of the small business lending market worth over $600 billion by 2015, they have carved out a clear niche for themselves on the market. Their market share is also growing, particularly in California, but it is also important to look at alternatives to online loans such as the Small Business Administration (SBA) 504 loan.  The SBA 504 Loan can help small business owners thinking about expanding and may be a better overall than most online loan options. Either way, before diving into this relatively new world of online loans, here are some of the pros and cons to consider.

The Skinny on Online Loans

The main advantage of online loans is that they are easier to secure. Online lenders approve around 57% of loan applications, compared to about 25% on the part of large banks. They approve applicants with weaker credit records. They may also offer a wider range of credit options, with products such as unsecured business lines of credit or accounts receivable financing in addition to the term loans applicants are familiar with from conventional lenders (banks and credit unions).

Another advantage of finding a loan online is that many websites aggregate offers from different lenders. This enables a borrower to more effectively apply for several loans at one time, with only a single hard enquiry on their credit record.

However, there are some significant downsides to online lenders as well. A look at the math may convince applicants that the cost of convenience is too high.

For example, imagine you are an applicant seeking $1 million for a 10-year term. A conventional loan may make that financing available at 5% interest, which would mean monthly payments of $10,606.55 and a total of $272,786.18 in interest.

Online lenders, while “easier” on the surface, can get pretty expensive. They typically charge a spread of rates that start at the point where bank rates leave off. A loan for $1 million for 10 years at 9% interest would have monthly payments of $12,667.58 and total interest of $520,109.29. That is a difference of $247,323.11, meaning you’d be paying double what you would for a conventional loan!

In addition to this, regulation of online lenders—which are comparatively new player on the finance market—is lagging behind industry developments. California lawmakers have proposed extending legal controls over interest rates or creating new regulations, but those efforts have yet to see results.

Ultimately, online lenders acknowledge that their main role is to make credit available to borrowers who do not have any other options. This is undoubtedly the main service those lenders provide: lender of last resort. This means that borrowers should be aware of all their choices before choosing online lenders.

Besides conventional loans, other choices available to borrowers include microloan programs and the SBA 504 loan.

Financing With a SBA 504 Loan

If you are looking for an accessible loan that offers some of the ease and flexibility of an online loan while ensuring manageable interest rates and up-to-date legal controls, the SBA 504 loan might be for you.

The 504 loan program partners a nonprofit Certified Development Company (CDC) like TMC Financing with a conventional lender (bank or a credit union). This works to the borrower’s advantage because the conventional lender is more inclined to approve a 504 loan because of its first lien position on the loan. A 504 loan has three parts:

  • The first is a loan from a conventional lender—for at least 50% of the total project amount. The amount and conditions of that loan are determined separately, and it becomes the first mortgage. TMC can help match the borrower with the perfect banking partner for this loan, if requested.
  • The CDC facilitates a separate SBA loan of 40% of the total, up to $5 million, at a fixed, below-market rate. Manufacturing projects or projects eligible for the SBA’s Green Energy Program can receive up to $5.5 million. This is the second mortgage.
  • Then the borrower contributes 10% to the loan as down payment. Certain types of facilities are classified as single-purpose properties by the SBA and require a 15% down payment. These include businesses such as hotels, gas stations, medical facilities and vineyards and wineries.

The 504 loan has a 10-, 20-, or 25-year option. It is fully amortized (so there are no balloon payments).

A 504 loan can be used to:

It takes approximately the same amount of time to approve and fund a 504 loan as it takes for a conventional loan, unless you are working with a Premier Lender such as TMC Financing. The process can be expedited even further by prequalifying for the 504 loan. This will confirm the borrower’s eligibility and  determine the down payment that the loan will require. The only documents the CDC needs to prequalify a borrower for a 504 loan are:

  • Three years of personal and business tax returns
  • A personal financial statement
  • Interim financials

The 504 loan can be paid off early with minimal or no penalties.

The 504 loan provides accessible financing with flexible and cost-effective options designed to help your small business grow. It merits careful consideration when you are looking for a commercial loan.

You can find out more about the 504 loan from one of TMC Financing’s 504 loan experts. TMC is an SBA Premier Certified Lender and a high-volume loan provider. With over 35 years of experience, TMC can help you find the financing that is best for you and guide you through the 504 loan process. Contact TMC Financing today.

Barbara Morrison, a local small business advocate and civic leader, founded her first company TMC Financing in 1981. TMC is a Certified Development Company that provides commercial real estate financing to small business owners via the SBA 504 Loan Program. TMC consistently ranks among the top certified development companies nationwide, and has funded projects worth more than $9 billion across California and Nevada. Nearly 5,000 small businesses have benefitted from this financing, resulting in the creation of an estimated 50,000 jobs. TMC is also the No.1 SBA 504 hotel lender in the United States. Barbara is also the founder of Working Solutions, a Bay Area microlender whose mission is to provide micro entrepreneurs, particularly low-income individuals, women and minorities, with the access to capital and resources they need to start a successful business.
Barbara Morrison