Should your small business get a private loan? This is a question many struggling companies are facing in 2021. Private loans offer a solution to a growing problem. You can find the companies with solutions rated as best unsecured business loans to get a sense of these lenders. But do they come at too high a cost? Watch out for predatory business lenders.
Predatory Business Lenders
It’s no secret that America has a debt problem. This extends from the nation itself down to the individual consumer. A lack of regulation has led all the wrong people to struggling people owning multiple credit cards while paying back loans to banks and private lenders. Even before COVID-19, consumer debt amounted to over $10 trillion. Now, it stands at $14.35 trillion.
One of the biggest causes of consumer debt is the phenomenon of predatory business lenders. These are companies that offer immediate, unsecured loans at high interest rates that, even in the best case scenario, will end up costing borrowers dearly. Many are left in a debt spiral, having to take out more loans to pay back previous loans, and paying far more on interest than the sum of the loans themselves.
But it is no longer just consumers who are targeted by these kinds of companies. For struggling small businesses, private lenders offer the finance that they need either to get off the ground or to get through tough times. Many of these companies are predatory business lenders in a different guise.
With COVID-19 leading to the permanent closure of hundreds of thousands of small businesses, many more are battling to make do on loans provided by the SBA Paycheck Protection Program (PPP). Although more funding has been made available, there is simply not enough for companies with few prospects of recovering in the short term.
Private lenders offer an oasis for these companies, and in doing so lead them down a much darker path.
The Problem With Unsecured Business Loans
Online lenders offer the solution of unsecured business loans to companies with no assets and few other options. There is a reason they can provide such risky loans – unlike traditional banks, they are lightly regulated at best.
These loans often sound too good to be true. They come with high interest rates, but aren’t these rates still better than letting your business collapse? You can get one of these loans with hardly any paperwork and even less processing time, making the decision to apply something you can do on impulse.
The problem is that these interest rates, along with hidden fees, are so high that they don’t actually give your business much chance of survival. Rather, they become the reason your business fails after a brief respite, leaving many borrowers without the finances to even declare bankruptcy.
When you see a company offering unsecured business loans, it is wise to think of them like payday lenders. They are offering a service that is only possible because of its high cost and their freedom to be irresponsible with your money. They are predatory lenders that benefit far more from your struggle to pay them back than any future success.
Using Your Financial Nous Against You
There are some regulations around predatory online loans when it comes to consumers. Private lenders are bound by statutes like the Truth in Lending Act and Fair Debt Protection Practices Act. Lenders need to disclose just how risky these loans are. Of course, they find ways to do so without truly alerting the borrower to the reality, but the regulation is there.
When it comes to small businesses, there are no such statutes. That is because business owners are considered by regulators to be more sophisticated financially than individual consumers. In other words, the government puts the responsibility on the businesses not to get trapped by these companies, rather than actually regulating the lenders.
Unfortunately, it is not just naive consumers who get drawn in by these schemes. Small business owners, no matter how savvy, turn to online lenders in times of need for want of alternative options. It doesn’t help that these lenders are legitimised by their legality and lack of regulation.
Of course, the lack of regulation is not just a matter of chance. Many of these lenders, including Prosper and Lending Club, have the financial and political influence to ensure the industry stays largely unregulated.
The reality is that small businesses are on their own when it comes to unsecured business loans. If a business is desperately in need, a predatory lender might seem worth the risk, and some small businesses do indeed manage to survive this way.
Small Business Survival
The best route to survival through unsecured business loans is to go in with full knowledge of the risks. Ideally, your business has a good credit rating. If so, you will be able to get a better interest rate. If your credit rating is already in trouble, your application will either be unsuccessful or your loan will come with a very high interest rate.
Before applying for an online business loan, take yourself away from your devices and give yourself some time to think about whether it is really worthwhile. Speak to any other decision-makers in your business. Discuss whether you would even be considering this if you had any other options.
Also, check whether you are eligible for an SBA PPP loan. Companies that have already been granted a loan in 2020 may be able to get a second loan now. There are strict criteria your business would have to meet, including having not maxed out the available funds in the first wave.
Once you have done this, if you still want to go ahead with the unsecured loan, you need to take some time to research the different lenders. Some companies have great reputations and should not be lumped together with the predatory business lenders thriving in the industry. However, when you do see people complaining about a certain company’s unethical practices, take them seriously. There are none better at warning against bad lenders than those who have already been burnt.
Do Your Due Diligence
Taking out an unsecured business loan online can be extremely detrimental, especially with the sheer number of unethical predatory lenders out there these days. It is even more risky if you are doing so out of sheer desperation. That said, there are scrupulous companies which will provide you with loans designed to benefit you without trying to drain your business of every cent.
Be wary when applying for any online loans. We are definitely moving towards a more seamless digital financial existence, but for now the ease of online loans comes at a cost.