High-interest loans may seem enticing, but they come with enormous penalties

FINANCIAL SECURITY

You may have found yourself scrolling late at night or sitting in front of the TV when you see ads for fast cash loans with little to no credit checks. But when it comes to extremely high-interest small business loans, there is little room to prosper.

There are many problems that become evident over time after securing a loan with exorbitant interest rates, one major issue being the increased risk of default. Suppose a business takes on a high-interest loan and cannot generate enough revenue to repay it. In that case, they may end up defaulting on the loan, which can have serious consequences for their creditworthiness and future borrowing ability. First thing, don’t go for easy credit. Online loans with a 24-hour turnaround sound great, but they come with enormous penalties. So I would say take your time, do your research, and have your business plan in place.

Another problem can be the strain on cash flow. High loan payments can eat into a business’s cash reserves, making it difficult to cover other expenses or invest in growth opportunities. This can lead to a cycle of borrowing to cover existing debt, which can be unsustainable in the long run.

If you’re on a daily pay rate, and say you have a service business, or a merchant service (a financial service that enables businesses to accept credit card payments from their customers), they take a giant chunk every single day. We generally end up refinancing those loans due to their unsustainability, and very high cost to the business.

Extremely inflated interest rates mean that businesses will end up paying more in interest over the life of the loan, which can significantly increase the overall cost of borrowing and limit a business’s flexibility. We see the effective interest rate on those products is often 50 to 70 percent. And that may restrict the business’ ability to pivot or adapt to changing market conditions, as they may be tied to specific repayment terms or collateral requirements.

So that begs the question: What do you do now? You may have already taken out that loan or have been struggling to find a financing institution that’s willing to work with you.

At REDC, we work in partnership with local lenders or independently, to help small businesses in New Hampshire secure the funding needed to complete projects leading to job creation. They are working closely with entrepreneurs to find the right loan program, helping them obtain capital to start or grow their small businesses. When people come in, we sit with them, talk to them about expectations, what a realistic income and cash flow will look like, and get through that initial conversation. Over time, with the help of our business advisors, we can take that terrible loan, get refinanced, and put the client on a more linear path toward financial gains.

Laurel Adams is president of REDC, the Regional Economic Development Center, which is based in Raymond.