Alternative Business Loans: Good Capital or Source of Problems
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What cautious small business owners should know before committing to 'easy' cash flow financing.
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Alternative Business Loans: Good Capital or Source of Problems
- 2. The “Great Recession” in 2008 has had a lingering effect on how banks lend money to small business owners and entrepreneurs. ProvenResource.com
- 3. Gone are the days when small businesses have fast access to bank credit at competitive interest rates. Instead, alternative non-bank lenders, led by companies such as On Deck, Yellowstone, and Cash King, are filling the lending void, growing rapidly on the backs of unwary small business owners. ProvenResource.com
- 5. High rate loans are the rule rather than the exception for alternative lending sources. ProvenResource.com RATES THAT MAKE FORMER SUB-PRIME MORTGAGE LENDERS BLUSH.
- 6. ProvenResource.com These lenders are not banks and therefore are not federally regulated, unlike companies that provide loans to consumers. Instead these loans are often funded by private investors selling credit at effective annual rates that commonly exceed 30%. RATES THAT MAKE FORMER SUB-PRIME MORTGAGE LENDERS BLUSH.
- 7. Since alternative business lenders don’t look at individual or business credit ratings, their risk of not getting paid back is high. They rely on a business’s cash flow only and expect to be paid daily rather than monthly, by using a non- cancellable automatic payment deduction (“ACH”) out of the borrower’s account. ProvenResource.com NON-CANCELLABLE DAILY ACH’S.
- 8. ProvenResource.com The lender can immediately call a loan in default should a business owner fail to replenish their designated account. This exposes the borrower to litigation and further expenses. Borrowers should be confident that they can meet their daily, rather than monthly, obligations. NON-CANCELLABLE DAILY ACH’S.
- 9. Alternative loan contracts generally have expensive arbitration clauses where the debtor agrees to forgo the traditional legal process for a binding decision from designated arbitrators. ProvenResource.com ARBITRATION
- 10. ProvenResource.com Arbitration clauses are not favorable to borrowers. They often dictate where a legal case can be heard, usually in a creditor friendly state far removed from the borrower. This creates added expenses to a case even before it’s heard on the merits. Arbitration decisions usually cannot be appealed (“binding arbitration”). Finally, professional arbitrators have been criticized for having biases in favor of lenders since successful arbitrators make their living from work referred to them by the lending industry. ARBITRATION
- 11. Many lenders have business borrowers essentially endorse a “consent judgment” before the ink is even dry on the original lending agreement. In a consent judgment, the borrower admits to a default and to the terms of a judgment against them, waiving any legal protections that they might otherwise have. ProvenResource.com CONSENT JUDGMENTS
- 12. Lender’s will say that this instrument is harmless and only used in the event of an actual default. ProvenResource.com It’s a disturbing trend because it sets the borrower up for failure and legally neutralizes them. (Imagine a hospital locating a corn beef stand next to the cardiac care unit or meeting a bank’s REO bank officer right after you close on the purchase of your home.) CONSENT JUDGMENTS
- 13. While the business loan is given to the business in name, the small business owner often personally guarantees the payments in the event that their business fails. ProvenResource.com PERSONAL GUARANTEES
- 14. Personal loan guarantees are an integral part of the lending agreement, so borrowers should think carefully before signing. ProvenResource.com Lenders will look to the former business owner to make payments long after a business closes it doors. Alternative business loans appeal to business owners because the loan process is much faster than traditional lending sources (some lenders say a loan approval can be given in less than 48 hours) and there are no personal credit requirements. PERSONAL GUARANTEES
- 15. If you don’t need the money "yesterday" (these type of lenders anticipate that you do) then one should seek assistance through a non-profit dedicated to helping business owners in all areas of business and finance, a SBA lender (Small Business Administration), or the assistance of a knowledgeable business attorney who can help you negotiate a far better loan agreement. ProvenResource.com PERSONAL GUARANTEES
- 16. Since 1990, attorney David Soble has represented lenders, loan servicers, consumers and business owners in real estate, finance and compliance matters. For over 25 years, he has been involved in thousands of real estate transactions and has successfully negotiated and saved millions for his business and consumer clients. ABOUT THE AUTHOR ProvenResource.com 31800 Northwestern Hwy. Suite 350 Farmington Hills, MI 48334 Phone: (888) 789-1715 Disclaimer: You should not rely or act upon the contents of this article without seeking advice from your own, qualified attorney.