Alternative Business Loans: Good Capital or Source of Problems
The “Great Recession” in 2008 has had
a lingering effect on how banks lend
money to small business owners and
Gone are the days when small businesses have fast
access to bank credit at competitive interest rates.
Instead, alternative non-bank lenders, led by
companies such as On Deck, Yellowstone, and Cash
King, are filling the lending void, growing rapidly on
the backs of unwary small business owners.
High rate loans are the rule rather
than the exception for alternative
RATES THAT MAKE FORMER
These lenders are not banks and
therefore are not federally regulated,
unlike companies that provide loans
Instead these loans are often funded
by private investors selling credit at
effective annual rates that
commonly exceed 30%.
RATES THAT MAKE FORMER
Since alternative business lenders don’t
look at individual or business credit
ratings, their risk of not getting paid back
is high. They rely on a business’s cash
flow only and expect to be paid daily
rather than monthly, by using a non-
cancellable automatic payment deduction
(“ACH”) out of the borrower’s account.
The lender can immediately call a loan
in default should a business owner fail
to replenish their designated account.
This exposes the borrower to litigation
and further expenses. Borrowers should
be confident that they can meet their
daily, rather than monthly, obligations.
Alternative loan contracts generally
have expensive arbitration clauses
where the debtor agrees to forgo the
traditional legal process for a binding
decision from designated arbitrators.
Arbitration clauses are not favorable to
borrowers. They often dictate where a legal
case can be heard, usually in a creditor
friendly state far removed from the borrower.
This creates added expenses to a case even
before it’s heard on the merits.
Arbitration decisions usually cannot be
appealed (“binding arbitration”).
Finally, professional arbitrators have been
criticized for having biases in favor of
lenders since successful arbitrators make
their living from work referred to them by the
Many lenders have business borrowers
essentially endorse a “consent judgment”
before the ink is even dry on the original
lending agreement. In a consent judgment,
the borrower admits to a default and to the
terms of a judgment against them, waiving
any legal protections that they might
Lender’s will say that this instrument is
harmless and only used in the event of an
It’s a disturbing trend because it sets the
borrower up for failure and legally neutralizes
them. (Imagine a hospital locating a corn
beef stand next to the cardiac care unit or
meeting a bank’s REO bank officer right after
you close on the purchase of your home.)
While the business loan is given to
the business in name, the small
business owner often personally
guarantees the payments in the
event that their business fails.
Personal loan guarantees are an integral part
of the lending agreement, so borrowers
should think carefully before signing.
Lenders will look to the former business
owner to make payments long after a
business closes it doors.
Alternative business loans appeal to
business owners because the loan process is
much faster than traditional lending sources
(some lenders say a loan approval can be
given in less than 48 hours) and there are no
personal credit requirements.
If you don’t need the money "yesterday"
(these type of lenders anticipate that
you do) then one should seek
assistance through a non-profit
dedicated to helping business owners
in all areas of business and finance, a
SBA lender (Small Business
Administration), or the assistance of a
knowledgeable business attorney who
can help you negotiate a far better loan
Since 1990, attorney David Soble has represented
lenders, loan servicers, consumers and business
owners in real estate, finance and compliance matters.
For over 25 years, he has been involved in thousands
of real estate transactions and has successfully
negotiated and saved millions for his business and
ABOUT THE AUTHOR
31800 Northwestern Hwy.
Farmington Hills, MI 48334
Phone: (888) 789-1715
Disclaimer: You should not rely or act upon the contents of this article without seeking advice from your own, qualified attorney.