Posts Tagged ‘bad credit financing’

New Company Provides Loans To Small Businesses Based on Cash Flows and Not Credit Scores

I saw this article in the New York Times  about how this company, On Deck Capital, was loaning money to small businesses based on their cash flow and not on their credit score. While this sounds good, there are a few interesting and disturbing caveats to getting the money:

1: Businesses must provide information and access to their online banking information

If this company has its servers hacked, then every business who has taken out a loan is at risk of having their bank accounts cleaned out, not to mention it is creepy to have to basically turn over your bank account info to a loan company…to anyone, really.

2: Information about the business’ payment processor

I’m not sure if this would include the credit card numbers of customers, but if it does, again this is a major security hole.

3: Accounting information

This is standard, and I would expect any bank to ask for accounting records over a period of time to show an ability to repay.

The repayment term is six to twelve months, and a business may repay early, but if they do, they must still pay all interest and fees that would have accrued had the loan run the full term.  Thus, there is no incentive to repay early and clear the debt, which should be anyone’s objective with any debt.

This credit is expensive with up to a 30% interest rate and the money comes from hedge funds.  These are the same guys making risky mortgage loans and then betting on the fact that they’d default in order to make even more money.

Loans are repaid through daily automatic debits from the borrower’s bank account. Once 75% of a current loan is paid off, the business may get another loan.  To me, this smacks of the old insurance scam where the elderly and the poor were roped into buying “cheap” insurance policies. Then the agents who sold these scam policies to them would  come  by on a weekly basis to collect the premiums from them, pretty much forever. Only, this is worse since the loan company has full access to your bank account.

While the concept sounds good in theory, in practice it is just another in a long line of credit products for “risky” borrowers that strip wealth from Main Street and suck it into Wall Street.

So everyone needs to stop talking about optical interest rates on short-duration, small-dollar transactions, because it is resulting in businesses not getting access to capital that they can much more than afford.

This quote kind of says it all: don’t complain about usurious interest rates because then businesses (or people) won’t get access to the credit they need.

Really? There is no middle ground, where lenders can earn a decent profit without draining the borrowers dry? This concept of lending based on proven cash flow is actually a pretty good one. After all,  a lender should make sure the borrower is ABLE to pay the money they borrowed back. I’m all for that. What I’m against are overly high financing costs, the sum total of which you must pay, whether or not you choose to repay what you borrowed early.

Bad Credit Financing: Designed For Failure

bad credit

Lenders and brokers who loan money to people with lower incomes and spotty credit will all claim that they provide a valuable service to a community that is underserved by traditional lenders. But do they really? Or are they instead exploiting the plight of our most vulnerable citizens by promoting an endless cycle of debt and making a killing off the interest and other fees they charge?

While it is a good idea to give people who might not normally have the access to financing a leg up, surely that leg up should not also come with a heavy weight attached to it in the form of draconian and exotic terms that make it close to impossible for the borrower to successfully meet his obligations.


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