Small business borrowing: Easy, fast, affordable – choose two

Even as the nation recovered slowly from the Great Recession, commercial bank lending policies for businesses with short track records or owners challenged with credit score or collateral deficiency issues seemed as tight as ever. 

As we moved into the second decade of the century, CEDF watched as a flurry of new lending sources came on the scene in tandem with what might someday be labeled the high-speed internet age or the smartphone era. Claiming to provide quick turnaround, few requirements and often just a “simple fee,” business has been booming for these alternative sources.

But at CEDF applicants also began showing up buried in debt and in trouble with the loans they took out from the easy, internet lenders.

Most small business owners can sympathize with the attractiveness of these kinds of offerings especially when in a financial crunch.  Detailed business plan with financial projections to support the loan proposal? Not required.  Credit score minimum?  As long as it’s above your pulse rate. Repayment terms?  So easy when the money comes out of your account automatically every day, huh?

Not so fast. We’re taking some small comfort at CEDF that the media is starting to write about the problems that come with these offerings. And the biggest seems to be a lack of transparency about the effective interest rates.  You see, the arithmetic isn’t done the traditional way by these lenders as it would be by CEDF or by a commercial bank.

This article from Money magazine does a particularly good job of explaining the realities.

“Short-term lenders often quote rates that at first blush are on a par with a credit card interest rate, if not a bank loan. But the comparison, whether intended to be so or not, is misleading. Usually the rate is much higher. The difference stems from the way the cost is computed.”   —  Money magazine, July 19, 2016 

Desperate times in business can call for desperate solutions? Small business owners might not feel so desperate once they understand how to do the arithmetic.  Sayings like the “speed, quality, price” aphorism adapted to the headline for this article remain true. There are reasons why prudent, affordable business loans take time and effort.  Short cuts don’t come cheap.

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