More on Predatory Small-Business Lending

As we discussed in a previous post, predatory small-business lending is still a big threat to small businesses, despite that the federal government has cracked down on unfair and abusive lending practices in general. Predatory small-business lenders target all types of small businesses, given the difficulty these organizations often have in obtaining traditional loans.

However, young, poor, or struggling businesses, as well as businesses helmed by women and minorities, are especially vulnerable (in our next post, we’ll explore why women and minorities have particular difficulty obtaining conventional loans). Some are so green they don’t understand what they’re signing, others have been turned down for traditional loans already, and many are so desperate that they agree to terms that will, ultimately, send them so deeply into debt that they’ll never be able climb out again.
Organizations that fall victim to predatory small-business lenders find themselves continually paying much more interest than principal, meaning it’s nearly impossible to pay off the loans. Plus, since so much of their monthly cash flow needs to go toward paying back those loans, they’re often forced to borrow more money just to keep their doors open each day.

Fortunately, there are some ways in which you can spot a predatory small-business lender. We discussed several of them in our last post. Today, we’ll go over a few more warning signs of a predatory small-business lender, and then provide you with some resources for obtaining a fair small-business loan from a trustworthy lender.

1. High Rates and Steep Fees

Too often, desperate borrowers are lured into loans with unfairly high rates and nonsense fees. These loans are designed only to support the financial interests of the lender and fail to protect, let alone help, the borrower. How can you spot predatory small-business lenders who engage in this practice? Look for unusual fees (it’s important that you know what a typical business loan agreement looks like) and inflated interest rates.

Unfair fees include an unusual number of points (look for three or less on your loan) and large pre-pay penalties. Small pre-pay fees may be reasonable, but huge fees are not. Also, be wary of lenders who allow you to pay off your loan early only if you agree to take out another, larger loan—this is a sneaky practice designed to keep you trapped in a constant cycle of debt.

An inflated interest rate can signal that you’re dealing with a shady lender. The rate increase may be billed as a “yield spread premium” and is a sign that a broker is attempting to cover his fees, meaning you’re paying more than you have to. If you work with a broker, he or she should always be honest about any fees they may charge you. By hiding their fees, you’re being led to believe you’re getting a better deal than you actually are.

2. Unreasonable Repayment Schedules

Most loans must be repaid monthly, but some loans require that you pay them back more quickly. In some cases, that’s okay, but only if you are aware of what you’re agreeing to before you sign, AND as long as you know you can reasonably afford to pay back the borrower in the agreed-upon timeframe. Because most loans are paid back monthly, it can be frighteningly easy to overlook nontypical repay schedules, such as those requiring weekly or even daily payments, especially if you’re dealing with a quick-to-close online lender. Reputable small-business lenders will take steps to ensure you understand all the terms of your loan agreement, but ultimately, it’s up to you to protect your interests and ensure you receive a fair small-business loan.

3. Lack of Information on Lender

If you can’t find a physical address for a lender or if the lender has a poor web presence, this is a warning sign you could be dealing with a predatory small-business lender. Your lender should have a robust, secure website and should also be easily found in search engines. Ideally, you should be able to read reviews on the lender from other borrowers as well as visit the lender’s social media pages to learn more about their clientele. You should be able to contact the lender by phone and email (and you should make a point of contacting the lender through both channels before you sign anything).

Trusted Resources for Fair Small-Business Loans

1. Banks and credit unions are a great place to start when searching for a fair small-business loan. However, you typically need lots of collateral and must have been in business for at least a couple of years, so it can be tough to qualify. And of course, you probably wouldn’t be reading this post if you had easy access to this type of financing.
2. Online lenders can be a valuable resource for obtaining a business loan. However, because it’s difficult for the government to monitor and regulate online lenders, it’s critical that you do your research, or you may end up on the hook for a loan you really can’t afford. Your best bet for finding a loan through online channels is to research, research, research. It’s critical that you work only with reputable, well-known online lenders that don’t raise any of the red flags we’ve mentioned.
3. The Small Business Administration (SBA), while not technically a lender, can provide the backing your lender needs to invest in your business by offering you a loan. The SBA does this by guaranteeing to pay the lender back a portion of your loan in the event you default, making it easier for a bank to extend your business a loan. This option is a great way to go if your company hasn’t been in business long enough to qualify for a traditional loan. That said, you still need a strong financial record and excellent personal scores to qualify for an SBA-backed loan.
4. An alternative lender (a term that usually overlaps with online lender) is the moniker given to any lending institution that isn’t a bank or credit union. Alternative lenders are well known for extending credit to those businesses who can’t otherwise obtain it. They do this by using complex algorithms that use all types of data to determine your credit-worthiness, and, on average, they approve but it must be said that there’s a very fine—and often blurry—line between interest rates that are at the very high end of reasonable and those that are actually exorbitant (read: predatory).

Nevertheless, alternative lenders undoubtedly fill a critical gap in the lending marketplace. According to Fundera, “Whereas big banks have an approval rating between 13% and 20% over the past 5 years, alternative lenders have accepted on average between 61% and 64% of small business owners looking for funding.” So, they may very well serve your business’s needs—as long as you’re prepared to walk away if the interest rates offered to you seem excessively high. Now that you know how to avoid a predatory lender, how can you find a reputable alternative lender?

Using a reputable, well-establish lending broker such as Villa Nova Financing Group is an excellent way to obtain alternative financing at terms that are not only fair, but tailored for your business’ needs. Villa Nova takes the time to get to know you and your business so that we can recommend loans that are most suited to your situation. We take into account not only how much you need and whether you can pay it back, we also consider your other needs, challenges, and goals so we can custom-design a loan package that supports your business and helps it grow. Call us today to schedule a consultation with one of our business-loan experts!

In the second part of this series on predatory small-business lending, we further explore how to spot a predatory small-business lender, as well as provide you with tips and resources for obtaining a fair small-business loan.