After spending over 25 years as a restaurant owner / operator, I was one of the early customers of Rewards Network and took cash advances to grow my stable of restaurants. The money was wicked expensive – $2.00 paid back for ever $1.00 they advanced – but it was available when I needed it and they did drive business to my doors in the early days. My accountants thought the rates were extortion, but when I asked them for help getting me a bank line of credit, they couldn’t produce. Typical then and typical now.
In 2006, we started Strategic Funding with some restaurant veterans and professional finance people. Like AdvanceMe (now CAN Capital) before us, we knew we could do a better job and offer more favorable rates and terms based on the credit risk of each customer. One of the most important foundations of our small industry was a code of conduct that guided us in running our companies with integrity and fairness.
We were there to help our customers grow their businesses and never allowed them to over extend themselves or choke on too much debt. Companies in the space cooperated with one another to ensure that customers were not being over financed or that they were not double funding their customers who they knew could not afford the repayment terms for concurrent financing agreements. Like giving a kid too much Halloween candy, it could make them sick. Sure, we were looking to make a profit, but we understood full well that the health of these small businesses would ensure we were paid back and, if satisfied, the customer would renew when they needed us.
Many years have passed and the “alternative finance” industry has grown explosively, extending about $15 billion in credit last year as estimated by Bryant Park Capital. With that growth came evolution and mutations in the players who offered financing as well the business methods they employed. As in any industry there are good actors and bad actors, and the bad ones have proven to be very predatory. So how does a small business owner in need of working capital tell the good guys from the bad guys?
Bankers and finance professionals are required to “know your customer” or KYC. They don’t do business with you unless they know who you are, the background of your company and the backgrounds of all of the individuals running it. I have always recommended that borrowers do the same. You should know who you are borrowing from as you are establishing a legal and financial relationship with them for a period of time. Would you rent an apartment from a serial killer? Probably not. So why would you give confidential information like bank accounts, tax IDs and Social Security numbers to a company that may be a predator? Many of the same people that pushed stock swindles and sub-prime mortgages that triggered the 2009 recession saw new opportunity in irresponsibly pushing costly debt to high risk merchants.
The reputable companies like Strategic Funding, OnDeck, CAN and others quickly became concerned that abuses by bad players were harming – rather than helping – their small business clients. To help mitigate this, many of these companies came together and formed associations like the Small Business Finance Association (www.sbfassociation.org) to establish best practices that protected both the customers and the companies that provided their financing.
The first thing I have always told, and continue to tell, small business owners seeking financing is to do your research on ANY lender you are considering.
- Do they have a real and professional website? Anyone can load up a template and throw it on the net, but does it look like a legitimate company?
- Do they list a business address or are they operating behind a curtain? Is the address verifiable? If you can’t find them, there is a chance they are bad players.
- Do they list the management of the company? If they don’t want to tell you who they are, how would you know who you are dealing with?
- How long have they been in business? Can you verify this?
- Do they belong to an industry association like the SBFA?
- Do they have customer reviews, complaints or even legal actions filed against them?
- Consider how you became aware of this lender – did they cold call you without you knowing how they got your information? Or did you reach out to them through some other channel?
- Are you speaking to a company that is a direct lender (they provide the money) or is this a broker? This can be a smoky area – because while there are great brokers out there, there are just as many who misrepresent themselves as the firm providing the money when, in fact, they are just working for hefty commissions.
- Do you feel secure in giving this group your confidential information and know they will be obtaining your credit scores?
When speaking with the sales representative you should:
- Ask for a sample of their contract BEFORE sending your confidential information and then HAVE A LAWYER REVIEW IT!
- Determine if they disclosed all of the fees, cost of financing (interest or factor rates) and whether or not you truly understand them.
- Ask how they determine the financing amount and establish that you can reasonably afford to repay the debt without stressing the business.
- Ask about the repayment process – how much is being paid and how often? Can the lender change the payment amounts at their sole discretion?
- Ask what happens if you miss a payment or if there are insufficient funds? What are the company’s policies and procedures?
- Must they notify you in writing in the event of a default of your contract? How long do you have to cure?
- Ask if you have direct access to a customer service representative and if your account can be accessed from an online portal.
Knowing your lender and feeling comfortable that they are fair, professional and transparent will lead to a mutually beneficial experience.
There has been a lot of press lately about some companies employing bare knuckle methods with some of their clients – such as the practice of requiring a confession of judgment as a condition of financing. If you speak to a competent lawyer they will tell you that you are forfeiting your rights to due process if for some reason you cannot repay the debt. Weaponizing this legal instrument can result in seizure of all your business and personal assets. I recommend that you get an email from the sales rep getting your funding that states that you will not be required to sign a Confession of Judgment in order to receive your financing. Reputable companies do not require them and have found them to be damaging to all parties.
To be completely fair, I have seen a number of disreputable small business owners who have taken money from alternative finance providers with no intention of repayment. This challenge has resulted in some companies employing these types of aggressive collections measures. The professional companies have taken another route by improving their underwriting and risk analysis and simply declining those applicants that they believe will not perform. Not everyone deserves to be funded. They have chosen to not finance a risky business, rather than employ Draconian measures that can destroy a business.
To conclude, borrower beware! If you are not careful the Grinch can steal more than Christmas! If you have any questions or just want to discuss your business, please contact me at firstname.lastname@example.org