About once a week in our work as loan brokers, we hear a heartbreaking story about a small-business owner or entrepreneur who made a borrowing mistake and is now desperately seeking our help. Sadly, sometimes, the damage is so deep that we have no tricks in our arsenal to help him or her.
Last week, I received a phone call from a second-generation family car business that has been in existence for 40 years. It has revenue of $3 million a year. During the recession, Chrysler pulled its dealership, and the family struggled to reinvent its business into a used-car and repair shop.
A Fatal Mistake
Just as the family was starting to see the some light at the end of the tunnel, it made the same mistake that tens of thousands of business owners make each month: It entered into an expensive and predatory cash advance loan with the hope that it could use the money to buy more inventory. Because of the way the loan was structured, there was not enough time to pay it off. So the family got another loan to try to catch up. Though the first loan had an annualized interest rate of about 70 percent, the second one was closer to 200 percent.
Now this business owner, who employs about two dozen people, is caught on a high-interest treadmill. Sadly, if the owner had sought proper advice before committing to the cash advance loan, he could have had other options. For example, he could have refinanced his building and taken some equity out of it. If he had done this, he would have gotten some cash out with 20 years to pay it back, instead of six months.
I can visualize the scenes at the cash advance lender and the car shop. At the lender, the highly commissioned, fast-talking cash advance sales guys high-five one another when they close on the loan and go out for expensive cocktails to celebrate. As they celebrate their success, the Main Street small-business owner risks losing the company that has been in his family for 40 years, and dozens of employees lose their jobs. Meanwhile, the lender’s collection department and lawyers are waiting in the background, licking their lips and waiting to litigate with the blanket lien they filed on the business's assets.
Unfortunately, incidents like this are more commonplace than you can possibly imagine. So if you're considering one of these high-interest and fast-amortizing cash advance loans, make sure you read the fine print and consider all your options before you jump onto a treadmill you can't escape.