As a former small business owner of a large professional services firm, I know first hand the dozens of daily postcards, emails, text message and phone calls a CEO or business owner receives each week from “alternative financing” companies offering quick and, in many cases, much-needed working capital. These organizations do so for one big reason — the tactic works.
Businesses that respond positively to these solicitations often do so for being “not bankable” and unable to fund immediate operational essentials, such as payroll. Alternative financing companies offer a lifeline, or so it seems until the payment comes due. This largely unregulated and predatory market can suck a company dry. The interest rate on such loans can be anywhere from 15 to 60 percent.
Here’s an example. Say a business signs on with one of these solicitors for a $50,000 working capital loan. The average terms for these loans are a seven month payback period with a total cost of $65,000. The CEO or business owner must come up with a fixed daily payment of $422 every weekday to pay it off. Businesses should take a moment to evaluate other financing packages. Best of all, owners can do this by simply asking the next alternative financing company that calls these five questions:
How Long Have You Been In Business?
Most states don’t regulate the working capital market, which means anyone with a cell phone and a website can become a broker overnight. Inquire how long the company has been around, what their track record is and if they can provide references. If they evade the questions or flat out refuse to answer, consider them not reputable.
Will You Meet Me Or Can I Find You?
See if the alternative financing company will welcome you “stopping by” their offices or, if based out of town, verify an address that is something other than a post office, private postal box or residence. Validating the company's legitimacy is important.
Do You Offer Pre-Payment Discounts?
If for some reason a business owner receives a well-deserved cash windfall, they should be allowed to pay off the debt early and not absorb all of the projected interest costs. Many alternative financing companies don’t accommodate this, and for a good reason. They make a ton of profit by forbidding pre-payments at a reduced fee.
What Other Options Are Available?
Most companies qualify for funding packages other than working capital. Options such as equipment financing can give businesses the resources they need at a fraction of the price. Ask the lender on the phone what else may work. If he or she says there's nothing else available or refuses to answer, hang up and go elsewhere.
Have You Ever Been In My Shoes?
Founders of reputable financing companies are people with backgrounds in running businesses other than lending operations. Their experience as a small business owner can offer more than just capital. They can also be great advisors.
The landscape of alternative financing companies comes with a litany of bad apples. Weeding your way through the myriad of predatory lenders can occur if you know what questions to ask. Take the ones I’ve listed to heart and pose them to the next cold call you receive from a funding service. You’ll cull the herd quickly when you do.
About the Author: Todd Stichler is the Founder of LendSpark, a business advisory service that assists companies in accessing multiple lines of financing, including traditional and alternative banks. He can be reached at firstname.lastname@example.org