Submitted by Rachel R on Thu, 06/26/2014 - 2:55pm
North Carolina small business owners should beware predatory loans
Image source: Flickr Creative Commons User Gerry Dincher
You have no doubt heard of subprime lending but may think of it as something limited to the mortgage industry that caused the big housing crash and recession. That's not true. Here's the skinny – sub means below and prime refers not to the prime rate but the credit worthiness of the borrower. A “prime” lending candidate is one that has a solid credit history and is earning enough money to easily pay off the debt.
A subprime loan is one made to a borrower who is considered a less-than-great candidate for a loan and, because they pose a greater credit risk, they are offered a much higher interest rate. Subprime loans come in every form – from high interest rate credit cards, to high interest rate home or car loans and now even business loans. Accepting a higher interest rate loan is never a great idea, but when it comes to business credit, it can end up destroying your small business.
What kind of business loans are being offered to subprime small biz owners?
Have you seen the movie Wolf of Wall Street? It tells the tale of fast-talking boiler room brokers conning people into making shady investments. One of the brokers that worked with Jordan Belfort, the wolf referred to in the title, is now making his bones making bad loans to business owners that are unaffordable and are resulting in increasing bankruptcy filings for small biz owners.
They are offering loans with interest rates as high as 125% to finance the purchase of assets and equipment needed by small business owners. Since these are collateralized loans (i.e. there is a physical item attached to the loan), the lender can simply seize your equipment or vehicles if you can't afford the stiff payments, which means you likely won't be able to keep your business running.
What are some of the lenders making subprime business loans?
Some of the lender names to be on the look out for include Naidus World Business Lenders, Business Financial Services Inc, OnDeck Capital, Yellowstone Capital and others. And here is another reason this type of lending is so predatory and insidious: In addition to charging horribly high interest rates, they routinely include a prepayment penalty so that if you can pay the debt off early, you're punished.
They also require borrowers to sign a personal guarantee so that if you can't pay the debt and your business goes bankrupt, they can go after your personal assets to try and recover what they loaned you and all of the outrageous interest and collection fees. As of now, this is an unregulated industry that is out of control. If you borrow a loan like this, what feels like a lifeline could be an anvil.
What are preferable ways to borrow for your business?
Rather than taking out a subprime loan, consider taking on investors in your business among friends or family. You can also try for a loan through Opportunity Finance Network, which works with lower income business owners. The federal Small Business Administration makes low interest business loans. You can also try a Kickstarter to get some crowd funding into your business. Subprime loans are rarely the answer to any financial dilemma and can end up not only wrecking your business, but your personal finances as well.
If you're a small business owner struggling with debt, contact the law offices of John T Orcutt for a free consultation on how a Chapter 11 bankruptcy can give you time to deal with your business debts while staying afloat. Free consultation – call now.
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