If you’re a small business owner who needs a financial boost in between paydays, a traditional payday loan may or may not be the best solution.
Depending on the amount and length of time you need to borrow, a payday loan could end up hurting more than helping.
With emergency money in mind, here are just a few challenges involved with traditional payday loans:
Interest Rates
Whenever you borrow money, there is interest involved – that’s just the way the financial world works. However, some payday loan companies charge substantially higher interest rates for their payday advances. How much? Well, the average interest rate for a payday loan is upwards of 400%.
That doesn’t sound too horrible for small loans that you pay off quickly. However, if it takes you two weeks or more to pay the balance of a large loan, you’re paying almost quadruple the amount you borrowed in interest.
Contracts
As the following article shows, just as there is interest involved with borrowing money there are also contracts. The problem with payday loans is the contracts are every bit in the lender’s favor. Most payday lenders put the major details, like the interest rates and fees, in the fine print.
Signing a contract for a payday loan is quick and easy, but that doesn’t mean you should rush through the process. If your small business is in need of a payday advance, make sure you ask questions and read, read, read the fine print. Also, don’t sign the contract if you don’t think you can meet the payoff terms.
Fees
On top of the high interest rates are the borrowing fees. Many payday lenders attach a standard fee for each dollar amount you borrow. This changes by state and county, but the average fee is about $15 for every $100 borrowed.
If for some reason you can’t meet the payoff deadline, your payday loan is usually rolled into a new loan and that new loan comes with another standard fee. Miss enough payoff dates and the fee amount might grow larger than the original loan and interest rate combined.
Collections Process
The goal with any loan is to pay off the balance as quickly as possible, but this is sometimes more difficult than it sounds. Although payday lenders like collecting interest on your loan, they also like collecting the money they are owed.
If you take too long to pay back your loan, many payday lenders will call your small business, call your family members, and even threaten to have you arrested. Although consumer protection agencies are working to stop this, these payday collection practices still take place.
Smart Borrowing
When your small business needs a payday advance, there are other ways to borrow money while avoiding the drawbacks above.
For instance, there’s a new breed of payday lenders that provide longer repayment terms, drastically lower APR’s, and repayment rewards including reduced interest rates.
Before you decide on a payday loan, research your options and choose a lender who is there to help your small business, not hurt your finances.
About the Author: Adam Groff is a freelance writer and creator of content. He writes on a variety of topics including finances and small business.