Jeffrey Kaliel on How to Protect Your Business from Predatory Lending

Due Diligence, Patience, and Planning Are Keys, Says Jeff Kaliel

Small businesses need financing to expand, launch new projects, and cover seasonal cash flow issues. However, many small businesses have difficulty obtaining loans from traditional banks.

Banks only lend to businesses at least two years old. They also typically avoid making loans smaller than $250,000 because small loans aren’t profitable, says Jeffrey Kaliel, an attorney.

The challenge for small businesses, then, is to find alternative financing while avoiding predatory lenders. Predatory lenders use fraud or deception or offer extremely poor loan terms, such as high-interest rates, high fees, or high prepayment penalties.

Kaliel has led several successful class action lawsuits against financial institutions with predatory lending practices. He offers these tips for financing your business while avoiding predatory lenders.

Seek a Non-Profit Lender

Community development financial institutions (CDFIs) will work with small businesses on loans up to $250,000. Their specific mission is to expand economic opportunity by serving those underserved by traditional banks. Loan approval rates are higher than at conventional banks. Indeed, a federal study indicates that about 77 percent of businesses that applied received loans. If you fail to qualify for the loan, most will coach you so that you will qualify within six months.

CDFIs also offer competitive interest rates. They also tend to offer fixed-rate loans with small or nonexistent origination fees. Many will provide ongoing business training.

The only downside is that CDFIs tend to move deliberately in approving and funding loans, so plan to allow enough time to get your money.

Consider Government-Backed Loans 

SBA-backed loans are another excellent alternative. Lending partners, often traditional banks, provide the loans; however, the SBA backing lowers the risk, making the bank more likely to approve the loan.

The SBA backs several types of loans to meet different needs. These loans often require little or no down payment, payoff terms of up to 10 years, and competitive interest rates. Even those with bad credit may qualify for a startup loan. 

SBA-backed loans also come with business education that can be valuable.

The US Department of Agriculture also backs small business loans for businesses in rural areas, defined as fewer than 50,000 people. Several types of USDA loans are available, including farm and rural development loans. In some cases, the USDA will also offer grants. The loans have a lengthy application process and typically require good credit, a minimum monthly business income, and collateral. 

Avoid SBA Look-alike Scams

Because the SBA has a good reputation as a small business lender, unethical lenders often try masquerading as the SBA to unsuspecting entrepreneurs. To avoid these scams:

• Remember, the SBA will not contact you with advertising or telemarketing. They wait for you to come to them.
• Avoid giving anyone upfront money to help you gain SBA approval. Upfront cash isn’t required and won’t help your chances. Those who ask you for it are scammers.
• Remember that the SBA does not require information about your credit cards. 
• Avoid installing software that the person says will help you gain access to loans. These are malware.
• Check the origin of any emails. Those from the SBA will end in sba.gov.

Carefully Analyze Before Expansion

Business growth doesn’t always lead to better cash flow. Before you undertake an expansion campaign, ask an account to do models of cash flow and financing so that you understand the impact of seeking new opportunities. Sometimes, the best business decision is to turn down a contract that requires significant investment in machinery or staff, especially if profits will be a long time coming. 

Consider Equity Partners

Many small business owners shutter at considering taking on an equity partner. However, equity financing may be the best way to exploit a high-growth and profitable opportunity. However, potential equity partners will want to see financial projections before they sign on.

Use Due Diligence

Every decision in business requires careful planning and research. Financing is no exception. Due diligence is a significant factor in avoiding predatory lending practices, says Jeff Kaliel.  

Pay attention to these details:

• Interest Rates. Make sure you understand the period quoted for the interest rate. More than one small business owner has congratulated themselves on getting a loan for 5 percent to realize too late that the rate is 5 percent a month, which equates to 60 percent annually.
• Payment Schedule. Look for single, set monthly payments. Be wary if the lender wants to debit your account once a week. Also, be wary of loan payments based on a percentage of sales. Also, read the fine print to see whether payments incur an administrative fee.
• Prepayment Penalties. Because lenders make money on the interest rates, some unethical ones will charge a penalty if you prepay the loan. On the other hand, most reputable leaders will allow you to pay off the loan early or switch to a lower-interest loan without penalty if the option is accessible to you.
• Application Process. Filing applications is no fun; however, you should avoid the temptation to choose a lender with a less-than-thorough application process. Lenders base their loan terms on risk. Those who make loans without requiring financial documents or credit checks are taking a more considerable risk and will charge accordingly. Also, part of the application process is assessing whether the loan will improve or hurt the health of your business. Avoiding the process increases the likelihood of taking a loan that will ultimately damage your business.
• Customer Service. Avoid borrowing from them if you have trouble reaching an individual to answer your questions or if their answers are elusive and unsatisfactory. The service will only get worse once you sign, says Jeffrey Kaliel.
• Reviews. Check reviews on any lender you are considering. Also, check their record through the Better Business Bureau.

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