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Pitfalls of Online Borrowing

borrowing-350.jpgTechnology in the banking industry has presented the small business owner with online borrowing platforms that are very enticing. Just listen to the radio, surf the net, notice social media advertisements or watch the television and you will undoubtedly encounter promotions for online business loans.

It is estimated that millions of Americans have tasted what many believe is the future of small business finance. Online borrowers are matched up with lenders promise approval of loan applications in less than 24 hours, below market interest rates and amounts up to $100k. These companies bundle up loan packages and sell them to large investor pools, not unlike what the mortgage lenders did before the mortgage loan crisis. Moody’s Investors Service has warned there are similarities to the mortgage lending crisis in the period before the 2008 mortgage bubble because lenders that market the loans quickly sell them off to investors. The companies do not suffer losses directly if the borrower defaults, which may embolden the lenders to lower their credit standards, Moody’s said.

Marketed as a solution to improving credit scores and providing credit to small businesses and families, these loan companies are instead worsening many business owners’ financial troubles.

When business owners are in trouble and easy credit is dangled in front of their faces, more times than not, they take the bait. Many of these new lenders are in-flexible, unethical and predatory…..all characteristics from which business owners must flee. Some are exhibiting troubling traits, according to borrowers, legal aid lawyers and consumer advocates.

Technology is a great thing but it can also have a very dark side.

David, a commercial furniture retail and leasing company in Houston, Texas, borrowed $60,000 in 2015 through OnDeck, an online lender. It was allowed access to the company’s bank account to withdraw funds daily, regardless of whether or not funds were available. The business was experiencing a slow down at the end of the year in 2015 and cash become tight. As a result of the arrangement, the company was constantly overdrawn and the lender would not budge in modifying their loan terms. David then got another loan from an online lender to support the issues the first loan created and he is struggling to pay off the debts. Borrowers like him are being gouged every day.

He is just one example of thousands of business owners that take the bait and end up regretting it. To begin with, David would not have qualified for this unsecured credit anywhere else. This is reminiscent of the mortgage loan crisis when, prior to the bubble bursting, almost anyone could obtain approval of a mortgage loan they really could not afford in the first place. Are we headed for another crisis? Hedge funds are throwing millions of dollars into securities that are made up of many troubled loans.

What’s the message to the small business owner considering an online loan? Run. If you don’t have the ability to collateralize your business debt with accounts receivables, equipment or property, pause and re-evaluate your short term business plan.

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