Ten years ago, free-wheeling mortgage lenders signed hopeful homeowners to loans they could never afford. We all know how that ended: a sea of realty yard signs.
In the past few years, predatory commercial lenders have begun following the predatory mortgage lenders’ example by offering high-interest and inappropriate loans to those businesses hoping to stay open “just a few more months.” Typically, these are short term merchant advances with high interest rates and terms in the six-month range.
The predatory business loan (a.k.a. “easy online business loan”) offered by most alternative lenders doesn’t fit a business’s unique needs and opportunities. It’s often just a short-term, high-priced cash advance that ensnares too many hard-working business owners. Worse, many “lenders” and brokers sell multiple loans to one customer, a practice called “stacking.” The focus is not the health or success of the client, rather selling debt.
Restauranteur Wrangles with Predatory Business Lender
Restaurants are particularly vulnerable to seasonal cash flow fluctuations.
After ten years running his successful Peruvian bistro, Los Balcones, owner Jorge Rodriquez Assereto decided in 2014 to expand.
He spent two years and $130,000 to rent the space next door until he finally got the money to buy it. He then spent tens of thousands more to hire a hip local design firm to redecorate. He put two of his most experienced bartenders on a plane to Peru to devise a new and unique cocktail menu.
When it came time to stock the bar, Assereto found he was out of funds. He needed another $30,000 to put this last finishing touch on his dream.
The restauranteur quickly discovered that traditional banks were done lending to him and while, yes, he could get the money from an alternative lender, he’d be paying at an annual rate of 60%. He signed and managed to pay it off at the six-month term period, but the compounding interest was an incredible strain.
Assereto is not alone in risking everything to stay in business. Predatory lending cases targeting business owners (and prosecuted by attorneys general) are on the rise.[/fusion_builder_column]
Avoid the Predatory Business Lender from the Beginning
Read through these tips to attune yourself to signs of usurious lenders. Rest assured you can get a small business loan funding alternative from an ethical and accountable lender, even if you have subprime credit.
Watch out for:
- The Words: “Fast Cash” or “Quick Loans”
The only loans that can arrive within three days or less are working capital loans and some equipment financing loans, and merchant or cash advances. You have to consider whether the first two are right for your business and whether you can afford the often high fees of the last. Working capital and cash/merchant advance put your cash flow at risk. Equipment financing can put your equipment at risk for repossession. Understanding the best loan for your business takes far more than you filling out a few fields on a form and submitting it.
- Inflated Fees
It’s understandable that loan brokers charge fees or “points” on the loan, but often these fees can go above 20% of the total interest/fees charged on the loan. That’s just too much to pay. Take the time to research business and commercial loan fees for a range of credit scores. Don’t hesitate to let the lender know you’re shopping around.
By all means, know your personal and business credit scores to save yourself time and disappointment. Why?
Predatory lenders may dangle low fees and then, once the borrower delivers the formal credit score, re-figures the points. It’s at this time that the points can go higher, ostensibly because you provided inaccurate credit score information initially.
Already tied into this lender and far along in the process, the borrower tends to just pull the trigger and take this loan at the higher rate. The sales agent typically has a message like, “the bad news is we found your credit score isn’t quite what you claim it to be. Luckily, we can still do the loan, just at a slightly higher rate.” This language makes the situation all the borrower’s fault while turning the lender into the hero. Don’t fall for it.
- Charging Up-Front or Advance Fees
Predatory lending sales people make low-cost working capital loans seem possible when they send you term sheets with false information. They then require you to sign the term sheet and send in upfront or advance fees. These fees can be called Processing Fees, Application Fees, etc.
Term sheets may be common with Equipment Financing, but with NOT for cash advances and small business loans. Unless you have loan documents that clearly state the loan and any fees, do not “buy into” the sales tactics of paying upfront fees for a daily payment loan.
- Second Set of Documents or Blanks
Predatory lenders get away with increased fees and interest rates by asking a borrower to complete a second set of documents after already submitting completed documents. Another trick is leaving spaces blank in the docs. Always read the loan documents and if they need to be re-signed, make sure you know what areas of the document have been changed and why.
- Early Repayment Penalties
Written into the extensive contract the borrower receives, early repayment penalties often go overlooked. Make sure to ask the lender if any repayment penalties exist and/or review the contract carefully. With so many contracts now sent online, conducting a search for the term can get you to it quickly. If you do find early repayment penalties, consider another lender. The ethical alternative lender does not have these fees.
More, the ethical lender will even offer a discount for early repayment. Check with the lenders you’re considering to see if they offer this reasonable accommodation.
Reading this post arms you against the predatory business lender. A little more digging to save a lot in fees should be your next step in securing business financing. To stay abreast of all the changes in business financing, sign up for our email newsletter here.
Taft, Isabelle. “Federal Rules Could Tame Wild West of PayDay Lending.” The Texas Tribune. June 20, 2016. http://www.governing.com/topics/finance/tt-payday-loan-rules-texas.html