In case you didn’t know, getting financing for pretty much anything is very hard to do today. Banks have tightened up the lending, ever since 2008’s mortgage meltdown. In order to qualify for a loan, you have to have collateral, income, and almost impeccable credit. It’s very hard for a small business owner to get funding for anything. As a consequence, alternative lending companies have sprung up all over the place.
In today’s blog post, I’d like to talk about the dangers of alternative financing.
There has been an explosion of people going into business for themselves. This is mostly because in 2008 people were laid off from their jobs. When they went to look for work, they couldn’t find it. So what a lot of people did, was start a small business. In any other time, that would’ve been okay. However, when the small business owners ran out of their savings, they started becoming late on credit payments. This affected their credit scores, and some small business owners were foreclosed on, and had to file for bankruptcy. At the same time, banks were tightening the reins on access to money. This provided a space for alternative lenders. I don’t want to say that all alternative lenders are bad, because are not. They serve a need in the small business community. However, the terms that you get with an alternative lender can be very costly. For instance, if you did a merchant loan (where you receive a loan from your credit card merchant company, and they are paid back one Credit Card charges come through their merchant services) you could pay upwards of 25% to 30% in payback fees to them. So if you borrow $10,000, you could very well pay the alternative lender $3000, just to borrow the money.
Another way, to look for financing is through other alternative financers. They’re not banks, but they loan money based on your ability to pay them back. For instance some will look at your financial statements, bank deposits, merchant deposits, and ignore your bad credit. In these type of scenarios, the alternative financer will determine how much money they will give you. What they will charge you, is a one-time financing for the, which usually is about 4% to 5% of the loan. So if we use that same $10,000, you would look at paying a one-time upfront fee, of $400 and $500. On top of that, you would have to pay some percentage back for as long as you have the loan. I’ve seen some percentages as high as 25%. At the end of the day, you would end up paying about 30% for alternative financing.
These companies get away with this? Very simply, there are not regulated. They are not banks, they do not have any regulatory board that tell them what to do. They have no rules, and it can sometimes seem like the Wild Wild West. The problem is, and the fact still remain that you need cash flow, to grow your business, pay employees, buy equipment, buy inventory, etc. So sometimes, you have no other choice.
If you have good credit, have collateral (or will use the money for collateral), and have income support (or will have income to support) the loan, you have options. You could explore a Small Business Administration (SBA) loan, a regular term loan, or a business line of credit. Another thing you could do, if you don’t need cash, is get a bunch of 0% introductory offer credit cards, and build your business that way. Provided, you pay off the credit cards before the introductory offer ends.
In today’s world, access to funding isn’t what it used to be. However don’t be deterred if you have bad credit. There are still options, albeit not very good ones.