Cash-advance loans may seem like a boon to desperate business owners. These lenders have grown increasingly popular in recent years, with dozens of new companies and a swarm of investment entering into the market. But despite the availability, for a small-business owner, taking a cash-advance loan is a major risk.
The vast majority of the time, a borrower will not be able to pay back the high advance rates plus the principal within the typical six-month loan period. At the end of the six months, if the borrower still owes, he or she will be forced into a renewal and even more fees. After two or three renewals, they can't get off of the cash-advance treadmill. While this is good news for the cash-advance industry, it's crippling for small-business owners.
Be wary of cutthroat lenders
In the cash-advance industry, there are no standards for failure to repay penalties. Some companies will report to credit bureaus and work with small businesses on extended payment plans, while others are more cutthroat, garnishing wages or forcing the company into a situation where filing bankruptcy becomes the only possible option.
If small-business owners cannot pay back cash advance loans, they will be forced to liquidate assets, take on more personal debt, or, in many cases, close up shop. If a wave of such closures occurs, the economy as a whole will take a serious hit.
My advice to small-business owners is to think critically about their financing needs and options before entering into an agreement with a cash-advance company. Consider all other options first. It's an arduous path to get off the debt-trap cycle of cash advances, and the result of too many businesses continuing down that path may be a crash that few see on the horizon.