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Be wary of predatory small business loans Q. I own a small business and frequently receive fliers from capital companies telling me I'm eligible for loans up to $100,000. One even stated that the fee was as low as 15% of the loan amount. My financial institution always wants so much documentation from me that I'm seriously thinking of taking out one of these loans. Are they as good of a deal that they appear to be?
A. You certainly aren’t the first business owner to be intrigued by these kinds of loan offers. Unfortunately, they reflect the old adage that if something appears too good to be true, it probably is. In fact, the loan you’re describing is typically what I consider predatory. Capital companies can get away with predatory practices because the federal government doesn’t regulate these kinds of loans.
In many cases, the terms in these offers are far different than what is advertised, so you must be careful not to be lured in by what can end up to be misleading terms and conditions. In the offer you mentioned with fees as low as 15% of the loan, for example, it might appear that you’re getting the deal of a lifetime. But a 15% fee is not the same thing as an annual percentage rate of 15%. In actuality, the fine print can reveal that a loan like you’re describing has an annual percentage rate of over 100%.
Unfortunately, small business owners across the country are finding out how detrimental some of these loans are. Some small business owners even find themselves in a position where they are unable to make the high loan payments, and end up closing their business as a result.
To protect yourself against predatory loans, never sign a contract without reading all the terms. Also, be sure to look at the Annual Percentage Rate, or APR, regardless of the length of the loan. (Short-term loans can appear to be a good deal, but may come with outrageous APRs.) If the loan documents don’t reveal the APR, then don’t sign them. In addition to knowing the APR of any loan you take, you need to know the monthly payment required. As a business owner, you will want to ensure that your cash flow allows you to make the new loan payments.
It’s far safer to seek loans from a bank or credit union. Though the amount of documentation can seem rigorous, your bank or credit union wants to ensure that your loan is good for you—and them. In other words, they want to make sure you are able to make the payments.
It wasn’t that long ago that predatory lenders harmed many people in the mortgage market. It seems the trend is moving more toward small business owners. As a business owner, you put your heart and soul into your business. Protect that investment by being aware of potential predatory loans.
Bonnie Spain is the executive director of the American Center for Credit Education and Consumer Credit Counseling Service of the Black Hills. For more information, email acce@acce-online.com.
The material in this transmission is provided for personal, non-commercial, educational, and informational purposes only. ACCE makes no representations or warranties with respect to the accuracy or completeness of the contents of this transmission and assumes no responsibility for errors, inaccuracies, omissions, or any inconsistency herein. You should consult a professional where appropriate.
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