Why "easy money" loans aren't good for your business

March 05, 2019


Business owners occasionally find themselves in need of funding to take the logical next step to grow their companies. Whether it’s to buy a costly new piece of equipment, hire more staff, or move into a new location, these investments may require significant working capital. But when that money isn’t readily available, what options are on the table?

These days, there’s no shortage of available options to provide short-term relief to business owners who need a quick injection of cash. Unfortunately, a lot of them bring more long-term frustration than they’re worth. Here are a few sources of funding that some business owners may be tempted to turn to when they’re in need of capital:  

Online lenders

Online lenders may look like a great option for business owners in need of money quickly. The desire to avoid time-consuming applications and credit checks is certainly understandable. However, while these loans may seem convenient, they generally come with exorbitant interest rates—and may even have predatory policies hidden in the fine print.

It’s also worth noting that since these lenders aren’t subject to the same regulation that governs traditional banks, your financial information may be easier to hack, leaving your business open to additional liability and frustration. Ultimately, many online lenders provide a quick fix and high long-term costs that can bring financial ruin to a new business.

Merchant cash advance (credit card receivables financing)

Credit card receivables financing, often called a “merchant cash advance,” occurs when lenders purchase a percentage of a business’s future credit card sales. This option results in a quick injection of cash in the form of a lump sum payment from the lender. That may seem like an ideal solution for business owners who need money right now, but remember: if it seems too good to be true, it usually is. Merchant cash advances that are easy to secure will almost always come with a high interest rate, and the lender controls the repayment, deducting the money automatically from your credit card receivables until their initial loan and all interest are paid off.

SBA 7a loans

The U.S. Small Business Administration (SBA) offers two main programs for business owners: the 7a loan and the 504 loan. Both of these options have their benefits, but there are some drawbacks in the 7a loan program that prospective borrowers should understand before moving forward. SBA 7a loans are adjustable-rate loans tied to the prime rate. Since there are no ceilings or floors, interest rates can shoot up significantly over a 20 or 25 year period. These loans also often come with higher fees than conventional loans, ranging from 2-3%. Read more about why these loans should be approached with caution here.

A better option

When quick financing options are plentiful, the more time-consuming process of applying for a traditional loan with an established bank may not seem worth it. However, as we’ve seen above, loans that look like easy money for your business are usually based on terms that are extremely beneficial to the lender, and may leave your business on the hook for high costs far into the future.

These lenders aren’t invested in the long-term success of your business; they’re simply concerned with closing the loan and recouping their money (and preferably quickly). Easy-money options like the ones described above are also generally one-size-fits-all. These lenders offer a high volume of questionable loans, and are unconcerned with providing tailored solutions for individual entities.

By contrast, working with a local bank offers several key advantages that are better for your business in the long term. For one, the interest rates on a traditional business loan through your local bank will likely be much more reasonable than the rates on any quick loan you can secure.

Your local banker will also be well-positioned to help you evaluate the big picture and make a decision that makes sense for the long-term health of your business.

While the best an easy-money lender can hope for is the total repayment of your loan, local banks love to forge long-term consultative relationships with their customers that turn borrowers into depositors.

At Business Bank of Texas, we’re a local bank focused on lending to local businesses, and we’re invested in their long-term health and success. We’re proud to offer our clients a consultative approach that helps their businesses grow.

One such client is Tarek El-Kadi, who had struggled to find lenders that understood and met the specific needs of his company, Saf-T-Box. However, when he reached out to Business Bank of Texas, we were able work with him to find a solution that allowed Saf-T-Box to grow. Read more of his story here.

While the temptation to go with the easiest and quickest source of funding for your business is understandable, it’s short-sighted at best. When you find an offer for easy credit, take the time to bring that offer to your local banker; they may be able to offer more funding, better terms, or both. More importantly, a good banker can look at the bigger picture—including cash flow needs and financial projections— to help you secure funding that will create sustainable growth and keep your business healthy in the long term.

Ed Lette

Business Bank of Texas

Ed Lette is a Founder of Business Bank of Texas. Serving as a licensed CPA since 1983, Ed’s extensive experience in the banking industry has led him to become the founding president of four national bank charters including Business Bank of Texas, N.A., and the chief financial officer of five national banks during his 45 year career. Ed serves as director of the Texas Bankers Association District 4, chairman of the Executive Advisory Council to the School of Business at Texas Lutheran University, and is a life member of the Texas Association of Business.
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