The Main Street Credit Gap and You

Are you familiar with the “Main Street Credit Gap”? Chances are that you, as a small business owner, are familiar with the concept even if the term itself is unfamiliar. The Main Street Credit Gap refers to the fact that, in spite of the availability of credit and the general upswing in the economy, small business loans are still quite scarce. Because of the sheer variety of small businesses, traditional lending channels can be difficult. Many small businesses looking to borrow money find themselves looking at steep interest rates or minimum sums far greater than they need, if they can even get a loan in the first place. So what’s a small business to do?

Small Businesses unfortunately experience a disadvantage when it comes to borrowing money.

Alternative Lending: Too Good to Be True?

We’ve touched on the issue briefly in our blog article entitled “Do You Have a Line of Credit (LOC) Yet??!?”. Because of the lack of traditional funding for small businesses, a series of startups and funds have started in order to provide alternative lending to small businesses. In theory, they hope to change the nature of startup capital by making it easier for new businesses to get the money they need. In theory, this alternative lending should be a great asset to small businesses. In theory.

Are these new class of Alternative Business lenders the future of Small Business? Or a scam?

However the reality of these Alternative Business Loan Startups is far more complicated.

The Reality of Alternative Lending

Now we cannot speak for all of these Alternative Lending Startups, but the whole point of this article is to stress that this is a “Buyer Beware” industry. A quick Google perusal will reveal a litany of lawsuits, complaints and controversy. The unregulated nature of this emerging industry combined with the reliance on loan brokers has created a perfect storm. Transparency is not required, interest rates are exorbitant and loan terms are unclear. Many have drawn comparisons to payday and title loan shops. There are even a few heartbreaking tales of small businesses getting trapped in a cycle of borrowing from one Alternative Lender to pay another.

In truth, the legal system is setup to protect consumers — not businesses — from deceptive trade practices and predatory lenders. The problem is most state and federal legislatures, when they think of “a business,” tend to think of Walmart, Apple and Exxon. These companies are sophisticated borrowers with large law firms at their beck-and-call, and experts at their disposal to evaluate lending contracts and practices. This is laughable when you think of your small business, but the problem is the legal system has very little protections for the small business owner when borrowing for one’s business.

The same person has many legal protections when borrowing as a consumer, and almost no legal protections when borrowing as a small business.

Protecting Your Business

As a result, it pays to be diligent when choosing a loan. Here are some helpful hints for choosing a loan for your business:

  • Shop it around. Compare rates and terms.
  • Beware of any unsolicited offers.
  • Make sure interest rates, terms and conditions are clearly spelled out.
  • Figure out what the Annual Percentage Rate (or APR) is for a loan. Beware of rates given by the day, week or month.
  • Beware of the fees. One late payment may trigger a different, exorbitant rate, or a loss of a valuable asset.
  • Don’t sign a personal guarantee if you can avoid it.
  • If it sounds too good to be true, it probably is.
  • Consider the source. Are you talking to a bank or a broker? Alternative lending startups often rely on loan brokers. Ask them if they make a commission off your loan.

When you really get down to it, researching and understanding your loan now can save your small business time and money in the long run.

Law 4 Small Business. A little law now can save a lot later.

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