Predatory lending in the digital age isn’t as easy to recognize as they may be in the movies. These types of lenders often target disproportionately small business owners of color who traditionally have the hardest time accessing capital and traditional financing.

Predatory small business lending has a long history in the U.S. For small businesses who are experiencing a slow sales cycle, a cash flow shortage, or need for more working capital to expand, getting fast financial help typically means taking on loans with extremely high interest rates, hidden prepayment penalties and fees, and daily payment deductions. 

Adding to this misery is the fact that business start-ups and minority small businesses often have a hard time getting approved for traditional financing for loans in smaller amounts or finding a lender that fit their needs, especially those businesses in rural and underserved communities. The lenders that step into this credit void are nonbank lenders such as mission-led Community Development Financial Institutions (CDFIs). CDFIs, like HBDI, help ensure that small businesses can access the financing they need that is fair, flexible, and affordable.

Small business owners are often tempted by high-interest rate loans because the fast turnaround, easy terms often sound irresistible, but the fine print and hidden costs can lead to a squeeze on cash flow or financial pressure that leaves no room for error during slow sales periods trapping small businesses in high-pressure survival mode. 

To clearly understand the difference between loan interest rates that are high based on the borrower’s risk, and rates that are high designed only to exploit small businesses with deceptive marketing, digital algorithms, or guaranteed approval for businesses that feel they have limited choices. As a small business, you have options and can be smart about how to avoid predatory loans by considering these following 3 tips before agreeing to any loan:  

1. Ask questions about the true costs, high loan fees, or unusual late charges. If the rates, fees, and terms haven’t been made crystal clear and are easily understood, don’t sign without taking a pause to think about hidden costs and don’t be pressured to close the loan fast. Predatory lenders and brokers are very good at avoiding questions about what the final loan costs and will promote how fast you can close the loan. You should never feel uneasy to ask for more information on the final loan costs or anxious to close the loan in a hurry. 
2. Take note of high prepayment penalties in the loan documents. Not all prepayment penalties are equal. A predatory lender might charge a high prepayment fee or offer to waive the fee in exchange for larger loan amounts you don’t need. You should read online reviews, request a clear breakdown of all early payoff terms in writing, and don’t be afraid to take the time to shop around for other lenders, like HBDI.
3. Does the upfront terms and conditions look too easy. In other words, if the terms seem too good to be true, double check because they probably are. Reputable lenders may be able to offer a faster-than-traditional loan approval, but a fair and sensible lender will require the small business to provide detailed financial and business information. Follow this guidance when you get a term sheet from a lender: have a trusted advisor, such as an attorney or CPA, look over the document with you, avoid being in a hurry to meet an unexpected signing deadline, and confirm that all fees, APRs, and repayment schedules are fully stated. 

No matter where you borrow, the interest rate on your loan is determined by how high the risk is of you not repaying the loan. Fair and affordable lenders provide equal access to capital which can be a key to building stronger, healthier small businesses that sustain and grow to support their communities. Think of your lender as a partner and a relationship, not just another bill to pay.