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Business Owners: Be Careful of Fast Money Loan Options

August 15, 2019 | Small Business Loans
Beware of Fast money loan options

Small-business owners are always under pressure. They need to maintain cash flow, control costs, meet payroll and sometimes replace equipment. If expenses pile up, entrepreneurs may be tempted by fast money loan products they’ll later regret.

EASY MONEY WITH A BIG PRICE TAG

Fast money loan options including the Merchant Cash Advance can often bleed a small business with jacked-up fees and hidden interest rates, obscuring the true cost of a loan. “These can be dangerous,” said Chuck Sinks, who heads the business advising department at CDC Small Business Finance. “The cost of funds from many of these alternative lenders can be ridiculously high.”  

These expensive loans are designed to appeal to businesses that have an urgent need for cash. It’s important to ask the lender questions so you understand the true cost of the money you are borrowing. Here is a brief summary of how they work.   

Companies that provide a Merchant Cash Advance, also known as an MCA, base the transaction on a borrower’s future credit-card sales. The lender scoops up a percentage of credit-card receipts based on an agreed-upon rate every day until the advance is fully repaid with interest. 

Similarly, other cash-flow loans consider the average daily balance of a business checking account to estimate revenues. That allows the lender to calculate a debit amount that will come out of the account every day for repayment. 

Still wondering how these type of loans work and how they might affect your business? Download our free guide: Want to get an online business loan: 10 questions to ask before committing to one.

To make matters worse, these loans are purposely made easy to get from a variety of alternative lenders on the internet with no scrutiny. Behind these seemingly innocuous transactions loom outrageous and often hidden rates, costs and fees, making MCAs and their ilk some of the most expensive types of business financing available.

“We have a client who was looking to acquire another brand and took several advances to help determine the value of this potential new asset,” said Nick Miluso, CDC’s Relationship Manager Team Lead. “When she came to us, her monthly payments were about $6,000. We were able to consolidate her various advances into one loan that dropped her payment to $1,600. She was thrilled.”


BORROWER BEWARE

Hidden rates, costs and fees can add an additional 40 to 350 percent, depending on the lender, to the size of the advance. Here are some keys to help you avoid many of the pitfalls that come with a fast money loan:

All these can compile with a devastating impact. 

“There is often a singular event that led business owners to have a need for quick capital,” Miluso said. “It wasn’t their day-to-day business operation. It was something urgent – a piece of expensive equipment broke or a client went out of business, leaving the business owner unpaid. They’re in a bind thinking, ‘Where do I go?’ If they take that first MCA loan, it’s a very, very hard cycle to break. I’ve seen the toll it takes on people. They’re in tears, mentally and emotionally broken.”


TIPS TO AVOID HIGH-INTEREST DEBT

CDC Small Business Finance offers a free e-book with 10 questions to ask before committing to any business financing, especially a fast money loan. In addition, Sinks and Miluso offered three rules for cash-strapped business owners. 

Click for your FREE guide to getting an online business loan

 


Tell our loan experts about your business, and they’ll work to match you with a financing plan that best suits you. Let’s talk! Reach us at loaninfo@cdcloans.com or (619) 243-8667.

 

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