The New York Times recently published a front page article on the aggressive, deceptive practices at play in the subprime used car market. Although auto lending is far removed from the small business lending we do at Dealstruck, there are some similar dynamics at play when business owners seek capital from alternative lenders.
DEALER INTERMEDIATION INCREASES COST TO THE BORROWER
Loan brokers often serve as a matchmaker between borrowers and lenders in the alternative lending space, a position that provides them tremendous power. They often present the pricing, terms, and options with a colored lens to convince borrowers that their options are limited, while giving the broker the highest possible fee.
Daily debit lenders and merchant cash providers often rely on brokers to source clients by allowing them to charge up to 15% above the usual price of a loan. Even when more affordable options for a business owner are available, brokers will often not point their clients toward such options since their fees would be lower (sidenote: Dealstruck caps broker commissions at 1%). Sadly, this is how healthy businesses find themselves pressured into financial products with an APR of above 100%.
There are certainly reputable loan brokers out there, but whenever possible try to speak directly to the lender to ensure you are getting accurate answers to all of your questions.
BEWARE OF HIDDEN FEES – KNOW WHAT YOU ARE PAYING BEFORE CLOSING
Just as shady car loans often come with add-ons like unusual insurance policies, in small business lending, loans often have hidden fees or opaque terms and pricing. For example, many merchant cash advance products are quoted on a buy-rate rather than an interest rate – as we explained previously, a 1.1 buy rate might look like 10% APR at first, but in reality it can end up being a 50%+ annual interest rate. Likewise, guaranty fees and other hidden costs are often stuck in the fine print, but borrowers often don’t realize what’s happened until the loan is signed and they’re stuck with absurd payments.
We fight this at Dealstruck by being completely transparent in regard to the true costs of our loans, and by helping customers understand the actual cost of both their existing financing and other options under consideration. As we explain to every borrower, we charge a 4% origination fee for our term loans, and an average $500 document fee and .5-1% servicing fee for draws our lines of credit. We’re confident that the strength of our products speak for themselves in an apples-to-apples comparison with the other options available to a non-bankable small business owner.
KEY TAKEAWAY
Knowing how external factors play into your loan is of huge benefit to you as a borrower. A small business loan is supposed to be a mechanism for helping your business grow, not an instrument for filling the pockets of brokers and lenders at your expense. At Dealstruck we are here to ensure that if you need access to capital you can get it at the rate you deserve, the best rate on the alternative market.