NFIB

Latest Loan Temptations: Look Before You Leap
03/ 07/ 2002


In the mail today I received an offer for an unsecured loan up to$100,000 at an Annual Percentage Rate (APR) of 13.99 percent. I'm pre-approved, they said, and all I had to do was phone in my application and the money would be available within 10 minutes. This sounds attractive, and I began thinking of how many small businesses might think of such a loan as a remedy for the cash-flow problems that often plague start-up companies. In today's Workshop, contributor Jeff Moses gives some advice before jumping into loan transactions.

But take a close look at such loans. Reading the fine print on the offer I received through the mail, I found several points that would make any such loan from this particular institution less attractive than a regular loan through a bank.

First, I noted that there was a 2 percent "transaction fee" for each check written (minimum $2 additional fee per check; maximum $15 per check).Think about how this would add up over time. Regular bank checks usually cost about a dime or less, and are free with certain types of accounts.

Second, the 13.99 percent rate would rise if a person "fails to pay any two consecutive monthly payments by their payment due dates." Certainly no one goes into a loan agreement expecting to make even one late payment, but circumstances do arise over the course of a year or longer that could result in late payments. How high would the rate go? I called the company and -- after being transferred through three departments -- was informed that the rate would go up to 22.99 percent.

The representative I spoke with said that this higher rate would go into effect only if a person fell two months behind in payments. But it clearly states on the application that this higher rate will go into effect even if a person is late two consecutive months. Such ambiguity makes it difficult to determine exactly what the terms of the loan are. Whenever you take out a loan, examine the wording of the agreement. This wording will supersede all verbal comments and agreements made by representatives.

In contrast to the 13.99 percent (up to 22.99 percent) percentage rate of the type of loan being discussed, a bank normally charges 1-2 percent over prime rate for unsecured business loans (revolving lines of credit). At the time this article was written (August 1999), prime was at 8 percent, meaning that such a business loan would cost 9-10 percent. An established business would be required to supply financial records when applying for such a bank loan. A new business would need to supply a business plan with the application.

Another type of loan by which a small business owner might consider financing their company is a home-equity loan, which is now frequently offered through the mail. This type of loan pays you a lump sum or establishes a line of credit, which is based on the equity in your home(whatever the home is worth after the first mortgage is paid). While nothing is essentially wrong with a home-equity loan, many companies soliciting through the mail make the terms sound wonderful, while actually charging exorbitant advance fees and tacking on additional charges. If you want to inquire about a home-equity loan, go to a bank in your area.

In conclusion, don't let a sudden cash shortage cause you to jump toward quick money. Such a leap could make things worse for you in the long run.

workshop.accounting.tue
9.14.99

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