If you own a small business, you have probably seen the ads for small business loans that offer “quick decisions” or “funds in your account today.” It is easy and quick and tempting especially when you are having a cash flow challenge or need working capital.

What if the ads included the Annual Percentage Rate (APR) of 40% to 350%?

APR is Annual Percentage Rate charged for loans and is the approximate yearly cost of borrowing money. Unfortunately, the APR is not always disclosed, and many small businesses end up with loans that have interest rates tied to sales levels, or payments tied to sales with large fees on top of the interest. The results can be disastrous for businesses.

Shelly Evans, owner of Honey Hush Boutique in Bogata, Texas, knows all too well about such loans.

“I had huge growth in my business and had also expanded into another sister store.  I began to run a little short on capital and took out a Shopify loan,” she explained. “It was so easy. In my account the next day, comes out daily without me even thinking about it. It did help. I bought inventory and planned ahead.”

But her success wasn’t enough.

“I was at a 48% growth and it was becoming harder to keep up.  Since one capital loan helped, I decided to take another one,” Shelly said. “My goal was to pay the first one off and only have one, but there wasn’t enough to pay it off and have capital needed, so that didn’t quite happen. This started a vicious cycle. The payments were so much and fees so high I just couldn’t maintain.”

Merchant loans or Cash Advances are just what they sound like. They are generally advances against future sales that are repaid daily, weekly or monthly by taking a percentage of debit and credit card receipts. The fees and structure result in APRs ranging from 40% to 350% based on terms, fees and how long it takes to repay the loan. Small businesses often have to get a second loan because of the cash drain of the first one and they end up in a debt spiral that threatens their business.

That’s what happened to Shelly. But in her case, it threatened her health, as well.

“I was living on my credit card and getting another to pay the credit card off. I began to sink and fast. I felt desperate. I was paying over $13,000 a month in capital loans. I was mentally suffering and my business was suffering,” she said.

Other loans advertised online often have monthly fees that range from 1% to 10% of the loan. A 1% fee sounds good, but that is 1% each month, making the APR closer to 12%, and there are generally fees on top of that. If the monthly fee is 5%, your APR is about 60%. In some cases, the fee decreases after a certain time period. Each one is different, so you need to ask the questions, understand your APR.

Some of these platforms have additional fees that you need to understand. Several have prepayment fees, so even paying it off has an extra cost.

It is easy to fall prey to these loans. You need money, you need it quickly and you believe your business can easily repay. Sometimes you are even referred by trusted sources. Take the time to work with someone to understand the actual costs and how that will affect your cash flow. Knowing the APR, the terms and how that works together is the best way to position your business for successful growth.

CU has consultants who can help you understand your cash flow so you really understand your borrowing needs. Getting more traditional small business loans may take a little longer. The time invested may save your business. As you understand your business cash flow, you may find you need to borrow less, borrow more or, in some cases, borrow nothing at all!
As a CDFI, CU makes small business loans that are REAL — Responsive, Equitable, Asset building and Legitimate.

  • 10%/12 or .83% per month or .027% per day that is charged on the principal balance of the loan. Regular amortized payments are applied first to the interest and then to the principal. Throughout the loan, the interest paid each month decreases as the principal balance decreases.

For Shelly Evans, such a loan saved her business and gave her peace of mind.

“Thankfully, I was able to get a loan to pay those capital loans off and free up over $10,000 a month,” she said. “I have definitely felt the relief and am beginning to heal and move forward again, which feels so great!”