Fees of a Cash Flow Loan:
Not only are the interest rates on cash flow loans high, but most of them also come with heavy fees, as well. Most cash flow lenders charge an origination fee of about 2.5% of the amount you are borrowing to process the loan. There will usually also be sizeable charges for late payments or if there are insufficient no credit check payday loans Edon OH funds in your account to cover a scheduled payment.
Liens and personal guarantees.
Cash flow loans are sometimes marketed as “unsecured business loans,”? which means you don’t need the collateral a bank would require to be approved. This isn’t entirely accurate, however. Cash flow lenders DO require security to lower the risk of losing their investment if you default, but instead of acquiring a specific asset from you, they will put a general lien on your entire business. You will also have to sign a personal guarantee for the loan, meaning if your business cannot pay it back, you will be personally responsible to do so.
Cash Flow Loan Automatic Payments:
One way cash flow lenders cover the increased risk of these loans is by taking payments directly out of your bank account to make sure they get paid back. Depending on the company and your loan terms, a payment might be taken every day or several times a week.
Some will go the fixed payment route, removing an agreed-upon sum each time, and others will take a percentage of your daily credit and debit card sales until the loan is paid off.
Why is this dangerous? It varies from day to day and month to month. You may be able to budget for a monthly expenditure like a loan payment, but are your finances down to the penny on a daily basis? What happens if you’re short that day and can’t meet the payment? What kind of extra fees will you now be hit with for having insufficient funds?
The second instance, taking a percentage of your sales, may sound like a better option, but it, too, is problematic. Many small businesses work on small profit margins. Depending on how much a lender is taking off the top, you may be left with precious little to meet your other obligations, much less anything left over. What does that mean for your business? No money for advertising, nothing to put away for expansion, and certainly nothing to save for future cash flow shortages.
The effect is a vicious cycle. You might borrow more money to pay back the money you’ve already borrowed. If you’re lucky, you’ll be able to stay afloat, but it’s not unusual for businesses to crumble under snowballing debt.
Cash Flow Loan Automatic Renewals:
To keep you in a loan cycle, some lenders will automatically renew a loan if it becomes past due. On the plus side, this would give you more time to pay, but the downside is you’re now saddled with additional fees, interest, and a longer payment term, making it that much more difficult to catch up and climb out of debt. This is another tremendously important reason to thoroughly read a loan agreement before you sign anything.
Lack of Transparency.
Many online lenders aren’t actually lenders but are, in fact, brokers. The downside of this is even less accountability, coupled with even higher fees. According to Businessweek, “OnDeck pays a commission to brokers who bring borrowers to their platform. That generally isn’t disclosed to borrowers; instead, brokers say, OnDeck approves a borrower for one rate, then allows the broker to charge another, higher rate and keep the difference. OnDeck limits how much its partners can charge to 12%. On a $50,000 loan, that’s $6,000.”? In other words, $6,000 over and above what you could have gotten it for yourself.