What your bankability says about the sustainability of your business

NOTSo long ago, there was a lot of noise and clarity about the concept of crowdfunding, which uses technology to aggregate funds from donors / lenders / investors for a specific recipient / company.

During this time, I have tried to be part of the clarity by writing several articles on the three different types of crowdfunding namely: Contribution Fundraising, Business Lending, and Investment Acquisition. . Today I want to revisit the loan model, with new information.

Crowdfunding is similar to the traditional type in that a request for funds comes with a promise of repayment with interest over a specific period. The proceeds of a bank loan come from depositors; with crowdfunding, the cash comes from investors. But unlike bank loans, crowdfunding is done almost exclusively online. Individuals use crowdfunding loans, but here we focus on corporate borrowing.

It is important to point out that the term crowdfunding is now more widely referred to as FinTech, because the interface process, from the introduction of the borrower and the debt service to the repayment of capital for investors, is carried out on a digital platform. At the heart of the purpose of this article is that regardless of the source of funding – crowdfunding or traditional – the interest and terms of small business loans are always higher and more stringent than for any other industry. Almost by definition, a small business loan is a high risk decision, for two main reasons:

  1. Most small businesses are undercapitalized and operate closer to closure than survival.
  2. Too many small business owners don’t track their financial performance enough to know where they are on this survival / closure continuum.

In the past, my standard advice to any small business owner was to try and get a loan from a local bank or credit union because whatever the rate and terms were always the most reasonable of all options. But if you have to go for a FinTech loan, the interest rate will be double digits, like 15% or even more. As cool and sexy as digital can be, there’s nothing sexy about paying off a loan more than you need to.

So, the only reason to use a FinTech lender is if you are having trouble getting a traditional loan. Being unbankable is associated with credit worthiness, which can be a low credit rating, lack of collateral, an unproven business model, low cash flow, or a combination of these. Frankly, when these examples apply, the business is probably in some financial desperation, and we all know what desperate people do. They do desperate things like paying double-digit interest just to try and keep a business going.

But since crowdfunding evolved into FinTech, another online funding option has materialized: Sources Merchant Cash Advance (MCA). They are not lenders in the traditional sense, like your bank or true FinTech lenders. The distinction is in how their contract for the provision of funds is worded – they call the transaction a purchase of future receivables, not a loan.

This detail is important to note because lenders – crowdfunding / FinTech and banks – must comply with state usury laws, which cap the annual interest rate on the loan. But as it structures its funding relationship, a typical MCA company operates outside of usury, which in some cases produces an APR well above 50%. Here’s a tough love: you won’t get out of an MCA deal because of:

  • How they take payment out of your bank account – not every month, but maybe every day.
  • The fees and interest they charge can be well over 50%.
  • Their contracts include “admission of judgment” language that puts you at an extremely disadvantageous legal position when you take their money.

So if you are bankable, borrow from a bank or credit union. If you’re not, the more lenient underwriting standards of FinTech companies might be the right option. Even at the very high prices of FinTech, you could get out of a dire situation if you have a viable and sustainable business model.

But here’s a tougher love: If you find your only option is to seek funds from an MCA source, the next step isn’t complicated, but it’s scary. Go ahead and lock your business doors – for good.

Write this on a rock … Finding out what level of borrowing you are eligible for simultaneously places your business on the survival / closure continuum. As crass as this indicator may be, it is just as steadfastly pure.

Jim blasingame is the author of The 3rd ingredient, the journey of analog ethics into the world of digital fear and greed.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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