One of the most alarming trends in small business funding solutions over the last few years has been the increased popularity of extremely high interest rate loans offered by online “fintech” lenders, also known as marketplace lenders, Merchant Cash Advance (MCA) lenders, and ACH lenders. Cash-squeezed small and medium-sized enterprises (SBEs) are easy prey to pop-up ads and spam e-mail campaigns that target the most desperate of borrowers.
Often, however, borrowers with better options also become victims of the enticing promise of quick cash within a couple days. SBEs are accumulating high-interest debt at record rates. Interest rates on these products can climb as high as 350%, but little transparency exists when it comes to disclosure. While the promise of instant cash sounds like an answer to their current cash flow problems, SBEs can end up owing online lenders twice and even three times the amount that they borrowed.
Online lenders require borrowers to agree to daily automatic deductions from their bank accounts. To make matters worse is the recent phenomenon of “stacking” online loans, meaning SBEs may obtain multiple online loans from various lenders, and then see all their cash drained from their checking accounts via auto-draft (ACH) or have daily charges on their credit cards. When borrowers take out a second – or third or fourth – online loan, bankruptcy and insolvency is all too often the next step.
Why would business owners risk their companies for short-term cash at such a high cost? In general, many don’t know they have other options. Online loans may be fast, but the costs are astronomical. Invoice or accounts receivable factoring is also fast, but less costly and much more flexible. Factoring provides instant working capital for SBEs without adding debt to their balance sheets. Regardless of their credit histories or collateral, SBEs can receive same-day cash advances from factoring companies by direct deposit, wire transfer, or other channels.
Dangers of online lending and stacking multiple loans
- Business may be unable to pay off accumulated debt
- Aggressively marketed loans prey on the immediacy of cash needs above everything else
- Exorbitant interest rates reduce SBE profitability and increase likelihood of insolvency
- Complicated and opaque loan agreements lack interest rate disclosures
- Daily ACH withdrawals from bank accounts and credit card accounts drain resources
- Money received for loan may be insufficient to pay back previous loans
- Bankruptcies ruin SBE owners’ credit
What can you do if you have already obtained one or more online loan? You may be able to work with a reputable invoice factoring company on a couple of fronts. Factoring companies can analyze a company’s accounts receivable to determine if there is enough value to pay off online loans with a much lower-cost debt-free product. If an SBE discovers it’s too late, and ruinous interest rates and daily cash withdrawals by online lenders have already bankrupted the company, factoring companies can offer Debtor-in-Possession (DIP) financing. In other words, factoring is an option even for companies that are in Chapter 11 or Chapter 13. Either way, factoring is significantly less costly and more flexible than online loans.
Interstate Capital, one of North America’s top factoring companies, has worked with more than 10,000 companies since 1993 to help them maintain their operations and grow their investments, regardless of their credit history, financial status, or debts. Before signing on with an MCA lender or other online site, contact Interstate Capital for fast debt-free working capital. If you have over-borrowed and are already paying off multiple loans, Interstate can help as well.