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How to Recognize Predatory Practices in Business Loan Companies, and How to Get Help

March 5, 2021
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The world of business loan companies is full of predatory lenders.  If you are desperate for business funding, it can be easy to take the bait and fall into their trap. You need to know how to tell predators from legit creditors, especially if you need to veer away from traditional financing.  You may think you know what to look for, but there are some predatory secrets that a lot of business owners are not privy to. 

How to Avoid Predatory Lenders When Looking for Business Loan Companies

biz loan companies Credit SuiteIt can be helpful to work with a business credit expert. Not only can they steer you toward responsible lenders, but they can also help you choose the type of funding that will work best for your needs.  A good one will help you build business credit at the same time.

Still, you need to know the signs of a predatory lender for yourself.  If you do not, you will not even be able to tell if you are working with a good business credit expert, or not.  

Signs of a Predatory Lender

Can you tell the difference between legit creditors and predatory lenders? 

According to Investopedia:

“Predatory lending benefits the lender and ignores or hinders the borrower’s ability to repay a debt. These lending tactics often try to take advantage of a borrower’s lack of understanding concerning loans, terms, or financial literacy.”

Predatory lending when it comes to business loans is becoming an increasingly prevalent problem

How do you keep yourself from wading off into shark infested waters?

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Avoid Business Loan Companies That Focus on Monthly Payment Rather Than Actual Loan Amount

They may insist on one large payment at the end of the term with only interest payments being made each month until that point. This is known as a balloon payment. In business lending, this can be useful if you are waiting on large sums of money at the end of the contract to repay the loan, so it isn’t necessarily a deal breaker. However, you do need to know that your payments are only paying interest and not reducing principal.

Recognize if this is really the type of loan that you need. Lenders should always be willing to disclose your total loan amount and terms. You should not have to beg for this or search for it. Lenders that focus only on the payment may be sketchy.

There are many things they can do to make a monthly payment lower, like extending the loan period, adding a large payment at the end (a balloon payment), or making adjustments to loan terms. All of these things can make your monthly payments look low, while in reality you are getting stuck with a bad loan. 

Note that while a balloon payment should be an automatic deal breaker, insistence on a balloon payment is an extra red flag. 

Good Business Loan Companies Will Not Add Unnecessary Extras Without Your Knowledge

Another common practice of predatory lenders is adding extras onto the loan. These are usually things the borrower does not need. Furthermore, the borrower will not even know they are there. The most common “extra” seems to be insurance products that do not offer any benefit.

Business Loan Companies and Confessions of Judgement

New York plays a unique role in the world of predatory lending. Understanding this can help you understand if you are about to become the prey. It all comes down to a confession of judgement. If a borrower signs a confession of judgement, they are basically agreeing to lose in a court battle if there is a dispute about repayment. 

Many cash-advance companies, which make up a large faction of predatory lenders, have their borrowers sign one of these.

New York state law is friendly to this type of contract. Regardless of where a loan takes place, it may include a “New York confession of judgement.” 

This could also mean you are agreeing that any lawsuits will be handled in New York state. That could greatly increase expenses if you do not live near there.  If you see one of these in your loan documents, do not sign it.  It is of no benefit to you. It only benefits the lender.

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Don’t Accept Punishment for Early Payment

Prepayment penalties should definitely be a red flag.  Early payment is good, period.  Even though the lender may lose some interest, they should not be too opposed to early repayment. By itself, it should not be the reason you do not take a loan. But it should make you continue with caution and look for other red flags. 

Good Business Loan Companies Do Not Have to Seek the Weak 

Business loan companies that specifically seek out underserved populations, such as minorities and immigrants, and those with bad credit should be considered carefully. This may include contacting business owners that fit into these types of categories directly, or targeting them with marketing campaigns designed for them specifically. 

If the focus is meant to make them think they are getting a great deal because they are in an underserved market, it could be sketchy.  While there are programs designed to help serve underserved populations, if something seems too good to be true, it likely is.

In fact, those that fall into these categories are more likely than others to fall prey, according to a 2015 Center for Responsible Lending Report.

A Good Business Loan Company Will Not Start With a Bad Deal

Some predatory lenders will try to earn trust by admitting they are offering a bad deal, then promising to fix it in the future. They claim they will allow for a refinance that will be a better option. Don’t fall for it. A bad deal is a bad deal.  Just walk away. 

Loan Flipping is a Classic Move for Predatory Business Loan Companies

This  is not the same as house flipping. Flipping a house can be very profitable. Loan flipping is actually a classic predatory lending tactic. When a predatory lender sees that you are struggling, they will offer a refinance. However, you end up paying points and fees again.  As a result, before it is over, you end up owing more than your original loan.

Sometimes you may end up owing even more than your collateral is worth. It is a vicious cycle, and it can bury you quickly.

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The Responsible Business Lending Coalition

This is a network of nonprofit and for-profit lenders, investors, and small business advocates. They have a common commitment to innovation in the small business lending industry. They also have serious concerns about the increase of irresponsible small business lending. 

In 2015 they drafted the Small Business Owners Bill of Rights.  When searching for a small business lender, look for those that have signed this.  There are many members of the Small Business Lending Coalition.

Here are a few examples: 

What is the Easiest Way to Avoid Predatory Business Loan Companies? 

Look for help when you can find it. Working with a company that specializes in helping small businesses find the funds they need can help you avoid predatory lenders. For example, Credit Suite works only with reputable lenders. With our Credit Line Hybrid and many other products, we connect businesses with lenders that we know to be safe to work with. 

Not only that, but we help you assess your fundablity at the same time, and work with you to figure out how to best fill in your business’s fundability weaknesses. If business credit is an issue, we can help you build that too!  The time to take action is now, before you look for business loan companies. Don’t take the chance of falling prey.

About the author 

Faith Stewart

Faith has a BBA with a major in Accounting, and a combined 20 years of experience in the fields of finance and account.

Before switching to writing, she spent 10 years working in various areas of small business and personal finance and accounting, including working as a public auditor at BKD, LLP, Financial Director at Central Arkansas Development Council, and Commercial Credit Analyst at Farmer's Bank and Trust.

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