by Debi Enders
Unfortunately, yes. Small businesses have been known to fall into the traps set by predatory lenders. There they find a trail of excessive and disguised fees, inflated interest rates, and other practices that make it next-to-impossible to repay their debt.
In a nutshell, predatory lending involves abusive lending practices that make loans easy to get – and difficult to pay back.
Often, owners don’t even realize they are taking out a loan. For example, imagine a company offering your small business a credit card machine at no up-front cost. (Such companies exist.) You agree to pay for the machine by giving the “lender” a small percentage of every credit card swipe on the machine.
To a cash-strapped business owner, it almost sounds too good to be true. And unfortunately it often is. The loan on the machine accrues interest at a high rate, and the monthly payment is small. Soon owners discover that they owe more than they did when they accepted the equipment.
How do you avoid working with unscrupulous lenders like these? Here are two red flags:
1. They say bad credit doesn’t matter. That should be your first hint that you’ll be paying excessive interest rates and fees. Lenders can’t otherwise afford the risk of making the loan.
2. They’re not concerned with how you’ll pay them back. That’s because they know you won’t be able to. Unprincipled lenders will take payments until you default – and then take back the collateral (e.g., the credit card equipment) and search for their next victim, leaving you in worse financial condition than when you started.
The bottom line? If it sounds too good to be true, it probably is. Play it safe, ask about repayment terms and work with lenders who have your best interests at heart.
Debi Enders (debi.enders@commercebank.com) is assistant vice president, small business banking at Commerce Bank.
Submitted 8 years 334 days ago