High-Priced Unsecured Small Business Loans - Do we Feel Grateful or Peeved?
As the owner of a small soft furnishings retailer in a medium-sized town in Ohio, Levi Richards remembers the good old days misty-eyed when shoppers would pop in on a whim, to put in an order for new curtains and matching carpets, or to do up the house because they were just bored with the way things had looked for a whole year. Sometimes, he would be especially fortunate, and a new business, maybe a hotel, would look in for an extra-large order doing up the entire decor at their 50-room establishment. Right about then, he would pick up the phone to the bank, and they would send an agent over with a check for $250,000, to bankroll the order. Unsecured small business loans like these would be a part of any bank's business plan; there would be a couple of forms to sign, tops, and it was money in the bank.
No one really wants to spend on frivolous luxuries like carpets and new bedspreads anymore, leave alone the beds that go under them. Few people are confident in the jobs they hold, if they haven't lost them already; and the banks have every intention, if they haven't been particularly responsible in their lending practices so far, of at least putting on a good mature face for the future. With his whole business model quite shaky, Mr. Richards knows that if he doesn't manage to balance his books on his own, the bank is just never going to be there for him anymore. Everything has changed about whole way business is done in America today. Credit is impossible; even petty credit in the form of credit cards, is unthinkable. If anything is keeping the whole show afloat, it is plain old American financial ingenuity, in the form of small financial businesses that offer unsecured small business loans to just about anybody they trust. For the privilege of being trusted, so what if you pay twice the interest rate you would at a bank?
It isn't just the badly-run irresponsible business that is scrambling for a loan anymore; solidly run businesses with great ideas are being turned down by banks left and right too. Unsecured small business loans are the only financial model that will support them anymore. And these only seem set to rise, what with President Obama having announced at the State of the Union address, that he proposes to set up a $30 billion line of credit to community banks, so that they can help resuscitate small business in the country. Large financial enterprises like Wells Fargo, that have long championed the cause of the small business, have quickly caught about 5% in their small business loans. It is about time.
Small financial firms have great purchase order financing options for people like Mr. Richards,. If he shows them a contract that says that someone is willing to buy his merchandise, they will extend a short-term loan for it. This makes a lot of sense, but there are no more than maybe four or five firms in the entire country that do this kind of business. The best thing about purchase order financing is that it doesn't matter how bad your credit is; if you have a valid purchase order to show them, you're in from the cold. The interest on unsecured small business loans runs to a 40% rate per annum? These loans are for no longer than 90 days usually, and no one actually ends up paying much interest.
But that doesn't really work out of plain trust; in addition to the purchase order, they also ask to own all the goods you buy with their purchase order financing money, until you pay. Of course, if people default, they just end up owning a hundred bolts of sofa fabric no one else wants. To keep this kind of thing from happening though, these small financial institutions use background checks and detectives to make sure that all as it seems. You would think that borrowers would be angry at these people for taking advantage of their situation with such high rates. But most of the time, they are only grateful; if they have to be angry at anybody, they usually pick the federal government.