While the housing bubble collapse of 2008 opened many consumers’ eyes to the devastating effects of bad mortgage loans, many still don’t know what a predatory small-business lender is or how to spot one. That’s worrisome, especially since approximately 543,000 new businesses launch each month. The truth is, though, that while consumer borrowers now enjoy more safeguards and tighter regulations, small-business borrowers are afforded few of the same protections. Because of this, it’s critical that, as a small business, you take the time to understand what a predatory small-business lender is and how to spot one.

First, though, we’ll define predatory small-business lending and explain why these creditors are still enjoying a good deal of success in spite of an increasingly innovative marketplace. While there is no official definition of a predatory loan, it’s been described by the FDIC as any loan that imposes “unfair and abusive loan terms on borrowers.” Essentially, predatory lending practices are any that endeavor to coerce borrowers into accepting unfair loans and/or loans that they don’t want, don’t need, or can’t afford. But why would anyone accept such a loan? As you may know, predatory consumer-based lenders, target the most vulnerable—those who are poor, uneducated, and/or those who represent minority groups. These are individuals who are denied traditional loans, don’t understand the terms they’re coerced into accepting, or are so desperate they agree to even the most unfair of terms.

The same goes for predatory small-business lenders. They prey on small businesses, many of whom can’t obtain traditional financing. They count on new business owners to be too overwhelmed or desperate to scrutinize the terms OR they create loan documents so confusing that borrowers have no idea what they’re signing. Soon, small-business borrowers find themselves drowning in high-interest rates, falling behind on payments, and borrowing more just to stay afloat. It’s no wonder the reports that “statistics show that borrowers lose more than $25 billion annually due to predatory practices.”

Luckily, there are steps you can take to ensure you receive a fair small-business loan. Here are some of the warning signs of a predatory small-business lender:

1. Too good to be true

Overworked, overwhelmed small-business owners have precious little time to devote to any one task, so it’s understandably difficult for you to find the time to go through lengthy application processes that are often required to obtain traditional financing. It’s little wonder then, that when you receive a “You’re Pre-Approved!” notice in the mail or see an ad online promising you quick and easy access to cash, your interest is immediately piqued.

But the loan application process—while at times unwieldy—is designed to determine whether you can repay your loan. In effect, the process serves as an important protection for both you and the lender. By contrast, reputable small-business lenders typically won’t send you unsolicited advertisements, nor will they attempt to lure you in with flashy, high-pressure, gimmicky ads. In addition, they’ll take the time to ensure you’re a good fit for the loan you’re seeking before giving you the stamp of approval.

2. Lack of transparency

As mentioned above, shady lenders like to hide unattractive or unfair terms in pages and pages of  “terms and conditions” documents. They’re adept at burying sneaky terms into loan documents that you may not discover until it’s too late. To keep you from discovering these hidden fees and surprise charges, lenders may lure you in “Limited Time Offer” loans that require you to sign on quickly (and before you’ve had time to peruse all your loan documents).

Another sign of a predatory small-business lender? If you receive a loan offer with interest rates that are listed in a format that’s difficult to calculate (rather than in the standard APR format), this is a red flag. Rates listed in this way are difficult to compare against other loan offers, making it virtually impossible to determine if the rate is fair and reasonable. It also may be unclear what will happen if you’re late making payments, if you pre-pay, or if you default. These terms, too, should be easy to understand and reasonable.

Reputable small-business lenders endeavor to use plain English terminology and take the time to ensure you understand each of the terms and conditions associated with your loan. They won’t require you to sign before a certain date to take advantage of a special promotional rate.

Next Up: More Ways to Spot a Predatory Small-Business Lender

The proliferation of online small-business lenders, coupled with the “on-demand” mentality that younger generations have come to embrace, have together led thousands of unsuspecting, desperate, frustrated borrowers to buy into shady loans. It’s critical that you know what a predatory small-business lender is and how to spot one. Luckily, there are plenty of signs, so we’ll walk you through a few more next time as well as give you some advice on how to ensure you’re working with a fair lender. In the meantime, if you need a small business loan, you can turn to Villa Nova Financing Group. We work with you to help you get a loan that will support your business’ needs and goals both now and well into the future. Contact us today to learn more or schedule an appointment to meet with one of our business-lending experts!

Make Your Move

If you’re the owner of a business who’s ready to better explore unique methods of financing, contact us at Villa Nova Financing Group. We have a tremendous amount of experience assessing businesses needs so we can assess how much you can borrow and what types of loans you’ll qualify for. We also can advise you on how to structure your new business loan so that it benefits your business’ financial situations.

Get answers to your questions

Do you feel like you are treading rough waters and surrounded by sharks? We invite you to speak with one of our commercial or residential mortgage experts about your financial and lifestyle goals. This no-obligation consultation can be held over the phone or in our Warren, NJ, office.

  • Please tell us about the type of loan or financing you are exploring.
  • This field is for validation purposes and should be left unchanged.