You’ve no doubt seen the ads on TV and other places for new and modern business lenders. They’re very approachable looking and it appears as if the loans are really easy to get… but beware!
If something is easy to ‘get in’ you can bet it’s going to be ‘hard to get out’.
Just like any loan, lease or agreement the devil is in the detail. If and when you carefully read the loan agreement it may scare the heck out of you!
Here’s a few reasons to be very careful about what you’re signing up for:
- Make sure you understand the full extent of repayments, taking into consideration such additional items as loan servicing fees, loan guarantee fees, late and returned payments fees. These are on top of the interest and can add up to thousands of dollars if you aren’t careful. In one case they increased the effective cost of a loan from 18.5% up to 24.7%. This wasn’t overtly mentioned in discussion with the lender.
- A direct debit is commonplace to give a lender to take weekly/monthly loan repayments from your bank account. When you read the fine print though, they pretty much have the right (and ability) to debit your bank account at any time for the full amount of the loan plus interest and charges! This is quite draconian and fraught with danger if they do it at an inopportune time. If they exercise this right (and some can do it without any warning) it could render your business inoperable, if you need to pay suppliers and don’t have the funds at the time.
- Directors’ Guarantees sound like a simple item on the loan agreement, however when you sign one of these you are pretty much taking on the debt yourself. They may call it an ‘unsecured loan’, but if you sign as a Guarantor they have a mortgage over your personal assets. They’re just calling it another name.
- ‘Charge of all assets’ clause gives a lender the right to register a caveat, mortgage or notice of interest on any register relating to assets of each party to the loan i.e. directors and guarantors. This means they effectively have a mortgage over personal assets of directors and guarantors.
Whilst modern lenders may appear much easier than banks, they are actually very similar, they just charge higher interest to cover potential loss from a percentage of borrowers and toughen up their ability to recover monies in the case of default or potential default.
In conclusion, if you as a director/guarantor are taking on all the responsibility for a business loan, perhaps you may be better off lending the money yourself*. At least that way you have some control over the funds and your own bank account! You may also be paying much less interest.
*There are strict laws relating to borrowing and lending of money to a business by shareholders you need to be aware of, ensure you seek advice from a qualified professional before doing so.
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