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 meet these needs is with a bank line of credit. The difficulty with that, especially for early stage companies (often less than two years) is that often their working capital needs are not great enough to make the efforts worthwhile for a bank, plus the fact that banks in general often already have a bias 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 is going to be paid off (paperwork) or if it is 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 gap and take advantage of the enormous computing power available today, more and more non-bank lenders have appeared to serve the small business market. That computing power enables these lenders to make decisions almost immediately after the borrower submits an application. Lenders take advantage of the huge 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, cell phone data, social media posts, Yelp reviews (and more), 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, funds are available the same day. But to take advantage of this speed, it will pay. Much.

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

• Lender A: 2.9% – 18.72% flat fee

• 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 up with here:

1. Research, research, research. There is a wealth of information available on the Internet about all types of online working capital lenders. Learn all you can about all the types, but especially about working capital lenders. But if you’re starting to settle for one or two, you need to really get into the specifics of the terms. There may be asset tying 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 research 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 waiting for payments on what you have sold. Think of credit cards. Pay in 30 days, without interest. But if you don’t pay it off at 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 incredibly valuable services that banks can’t (or more likely) won’t. Just make sure you understand what you’re getting into. Comfort can be expensive.