Loans Too Good to Be True, Usually Are
Many times, companies try to grow sales without adequate capital to support the up-front expense. This scenario inevitably causes a sense of desperation when payroll or some other critical expense cannot be met.
For cash-strapped businesses, Fintech lenders’ promise of fast and easy money is always enticing. But as is the case with all “it’s too good to be true” scenarios, there are pitfalls to Fintech loans. Aside from the high cost, Fintech lenders typically require a pledge of company assets to support the loan. They may promise not to record a UCC against company assets but many do. And if they do, that filing will trigger a default under a company’s current loan agreement.
Business owners looking to obtain a Fintech loan need to:
Always go with the numbers. Make sure you understand how much the loan will really cost. Calculate the annual percentage rate (APR). Many Fintech loans have APRs exceeding 50%; more if you fail to pay. While many of these loans are designed to be short term, they’re dependent on your capacity to pay.
Remember to review everything and read the fine print. Aside from the interest rate, Fintech lenders often include fees as part of the fine print so aside from the principal and the interest, you may be slapped with additional fees that would sink you further into debt. Don’t be pressured into simply “clicking” to accept terms and conditions like most do when signing up for online services.
If you’re told the loan is unsecured, don’t take that at face value. Read the language in the agreement. If the agreement talks about the lender taking a security interest or a pledge of assets or that by signing you’re agreeing to them purchasing rights to the receivables going forward, then the loan is secured. Before signing anything, send the agreement to your primary, senior lender to review to avoid any conflicts of interest.
Consult an attorney prior to entering into an arrangement where the Fintech lender requires you to sign a confession of judgment as you may be giving up certain rights.
Discuss with the Fintech lender how it determines when it will or will not subordinate its loan before you sign any agreement. Not knowing could kill your ability to refinance with other lenders. (And bankers: it could also impact your ability to get out of a relationship you want to exit.)
With online lenders specifically targeting cash-strapped businesses, business owners can easily find themselves in a significantly worse cash flow situation due to the allure of “easy” money. To avoid possible debt traps, prevention (cash flow planning) is always better than Fintech’s cure.
About Celtic Capital
Companies looking for working capital to cover operating expenses, fund growth, increase buying power and take advantage of vendor discounts and rebates turn to Celtic Capital. With an appetite for the more complex transactions, Celtic Capital has a history of success in crafting creative, flexible asset based financing solutions from $500,000 to $5 million with no financial covenants.
As an independent lender, working with companies nationwide, Celtic Capital is willing and able to alter price and deal structure and expand lines of credit to handle its clients’ increased revenues; and when cash flow is an issue, will look toward providing an inventory facility to help offset lost cash flow.