Merchant Lending: The Ultimate Small Business Trap
Many small business owners fall prey to merchant lenders because they don't understand the law and reality of the agreement. Practical tips are offered to assist those considering such loans.
Why Merchant Lenders Are AttractiveMany small businesses are owned and operated by individuals - sole proprietors. Others are limited liability companies, partnerships, or corporations. A great many those entities are still operated by a an individual. Regardless of the formation of the business, most are under-capitalized, which is a fancy way to say they operate on a shoestring. Operating capital is often desperately needed. Enter the "Merchant Lender" offering relatively easy credit even with poor or no credit. The interest is a little steep but lower than Visa or MasterCard, which the owner has already maxed-out, and the business really needs the money.
The Dirty SecretsFor a daily payment made directly from the business bank account to the merchant lender's account by automatic draw, significant loans can be obtained. Think what you could do with $100,000.00 in operating capital! So what are they other terms? Your entire business inventory is collateral for the debt and that agreement becomes a permanent public record as a UCC filing. So what, you're going to be selling and making a profit right?
Another condition is your personal guaranty that the debt will be repaid. For individuals and partnerships that is not a big surprise because you are the business. For those with corporations and limited liability companies this a poor deal because it gives away the ability to separate yourself from the liabilities of the company. You might even have to sign a "confession of judgment" meaning you admit to a court that you owe any unpaid funds if you default. Still, you really need the money and fast. What could go wrong? Well, life happens.
If you default, you will be sued and you will lose in court because you signed that confession of judgment. Before the lawsuit, you will be subjected to a barrage of collection letters and phone calls. This could rise to the level of abuse and cause great stress in your life. Unfortunately, you have no protection from that type of abuse because these are commercial loans NOT consumer loan.
Action Guide:1. Decide whether you can REALLY make the business a success.
2. Decide if you REALLY need a loan or if you can cut your budget more.
3. Never borrow more than afford to pay back or more than you need.
4. If you think you want to take loan, take the documents to a lawyer BEFORE you sign.
5. If you have a partnership, make sure your partners know about their individual liabilities
6. If you default, send letter by certified mail revoking consent to communication by cell phone to the merchant lender and its collectors. This can give you a bargaining chip in case of a collection lawsuit.