Predatory Lending: Why Small Businesses Become Prey

December 17, 2014 Linda Piazza

predatory-lending-why-small-businesses-become-prey

An article in Forbes last month asked: Is Compelling Banks To Refer Small Business Borrowers To Alternative Lenders A Good Idea?

Throughout the piece the author argues that, yes, banks should refer unqualified candidates to alternative lenders. This article illustrated how difficult it can be for small businesses to get affordable financing, which is great. But how about helping small businesses avoid high interest short-term loans and alternative lenders all together?

In the enterprise world, it’s possible. First though, let’s take a step back and take a look at issues small businesses face. Actually, let’s talk about you!

Let’s say you work as a writer—bear with me. You’ve got a low-paying job writing for a small town newspaper in California. You like your job, but it doesn’t pay enough. But you get paid on a consistent basis, every two weeks. While it’d be nice to get paid more, you do know exactly when you’ll get paid and can plan your spending accordingly.

One day, one of your articles catches the eye of an editor at a major newspaper based in New York City. She wants you to start contributing articles for the newspaper, which is distributed around the country and world. It’s a prestigious opportunity, so you’re thrilled. And you’re going to be paid handsomely for these articles—but it’ll be on a per-article basis. So you quit y­­our job, start pouring all your effort into your writing for the national newspaper, and you get your first article published. Your editor says to send her an invoice for $3,000, which you mail to her in New York. And that’s the last you hear about it for a while.

Weeks go by, and eventually it’s been a month since your article published. You’re hesitant to complain, because you don’t want to get off on the wrong foot with your new editor. But eventually it becomes too much and you call your editor, who says she approved the invoice and that it’s with the accounts payable office. It should arrive any day now, she says.

Your credit card due date comes and goes. Another week passes, and you call the accounts payable office to find out where your invoice is. It needs to be approved by a higher up executive since it is over $1,000, they say, and unfortunately he’s on vacation until next week. Now your rent payment due date passes, and your landlord is calling every day. He says you’ll be evicted if he doesn’t get a check. But you don’t have the money to pay the landlord.

So what do you do? You go to a payday loaner. The lender can get you money soon, but he’ll charge 15%— your paycheck will only be worth $2,550 instead of $3,000.  You take the loan, since it’s better than getting evicted.

Finally, after you’ve missed a credit card payment and nearly gotten evicted, your check arrives. At this point, you wonder whether it’s worth writing for this newspaper anymore if it’s going to be such a hassle just to get paid.

This situation happens all the time to small businesses. Except instead of dealing with a newspaper, their new employer could be a prestigious corporation. Just like you, these small businesses are afraid to ask for more reasonable payment terms for fear of losing the buyer. 

And instead of going to a payday lender, the small business goes to a factoring company, which is similar to a payday lender except they lend to businesses. Factoring has now become a trillion dollar business worldwide, partly because of extended payment terms.

Small businesses have weekly and monthly financial obligations, just like you and I. They have to make payroll, pay off credit cards, and pay for rent, all the while trying to grow their business.

And yet the average payment terms in the U.S. is 56 days.

Which brings us back to the Forbes article: if businesses could get paid earlier and improve their cash flow, many wouldn’t need short terms loans in the first place.

A supplier portal, eInvoicing and dynamic discounting solution would help small business suppliers to accelerate payments on a date that they decide, in exchange for a small discount agreed upon by both the buyer and supplier.

It’s a win-win. Taulia helps provide unprecedented visibility into the life of an invoice, is completely automated, and strengthens supply chains by helping cash-starved small businesses.

 

About the Author

Senior Director, Working Capital Solutions at Taulia. Linda has deep experience in both service and revenue generation positions and has a demonstrated history of improving revenue and client satisfaction. Learn more about Linda on LinkedIn: www.linkedin.com/pub/linda-piazza/0/b08/489/

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