Rise of Predatory Business Loans

With online lending and cash flow loans gaining popularity among small business owners as an “easier” financing option, it’s worth being cautious and noting some of the characteristics of predatory business loans.

Unfortunately, small business owners are common targets for predatory lending. It can be difficult for small businesses to get loans, especially startups with no track record of success. The reality is, if you’re unable to qualify for a loan from a mainstream bank, you’re left with fewer options.

Some of the places you might be tempted to turn to for a loan may practice predatory lending. Predatory lenders primarily target small business owners who:

  • Need immediate cash for an emergency
  • Have a checkered credit history
  • Are susceptible to being tricked into taking the burdensome product.

While there are many kinds of predatory lending, one broad generalization that can be made is that a predatory lender does not require evidence of the borrower’s ability to repay the loan. For this reason, the rates and terms are usually onerous and often hidden.

Signs that the loan you’re considering might put your business in jeopardy:

1. Unclear Pricing and Terms

The terms of the financing are not properly disclosed. They might be hidden, omitted or even falsely represented.

Predatory business loans may use unusual terms or formats to keep you from getting a clear sense of what’s going on. They may also try to rush you into accepting the loan before you’ve had time to review and clarify everything.

Make sure to read the fine print of the legal contract. If it’s not a simple interest calculation, you should ask why it’s not so simple.

2. Abnormal Payment Structures

It’s a balloon payment structure – lower payments upfront and a large payment at the end of the term. This dangerous arrangement may require the small business to roll into another expensive new loan to pay off the previous loan.

3. Too Vague or Complicated

A business owner should feel comfortable that they genuinely understand the loan product. If the lender is not directly answering your questions, you should be wondering what they’re trying to hide with obfuscation. Try to find lenders who offer a personalized, one-on-one experience. Reputable lenders should want to work with you to help you achieve your business goals.

4. Approval is Too Easy

Predatory Business Loans

If the lender guarantees a loan will be approved regardless of credit history without a full underwriting, the lending product may be extremely burdensome.

Reputable lenders require documentation, including detailed information about business plans and existing finances, before offering financing.

Protecting Your Business

In order for business owners to set themselves up for success, it’s always important they budget their revenue and expenses such that their cash flow permits the repayment of any loan.

Put simply, owners can protect themselves by knowing how much the business can borrow and how the business will repay the loan. The best defence against predatory lending is educating yourself and talking to a trusted advisor for further guidance and support.