Have you ever looked into a "daily payment loan" for your business?
Daily payment loans are products like some "working capital loans" or "merchant cash advance" products in the marketplace where you end up paying back some enormous amount of money over a short period of time.
We've been pretty vocal here at Smarter Finance USA about the fact that most of the time these "loans" are a pretty risky idea.
However, we just put together a daily payment loan for somebody.
Oh man, the dark side ROCKS!
Why are High Risk Business Loans So Awesome?
You get paid so much more for putting together a loan at a ridiculous interest rate than by offering reasonable products that maybe it's time to change names.
What do you think?
Would you like to take out a loan from Dumber Finance USA?
In all seriousness, though, many times there are more reasonable options than what is offered by the daily payment lenders out there, and much of the time when there aren't better options, you are better off not taking out a loan.
So, how could we recommend someone utilize such a senseless product?
Sometimes, Daily Payment Working Capital Products are OK
Here's the situation: I spoke with "Steve", a small business owner running an awesome company that makes websites for companies.
Steve is in a pickle that many small businesses find themselves in.
You work your ass off until you get to the point that you've grown enough that you can't take on any more business without sacrificing the quality of your product or service, and you find yourself turning away business.
With an employee, you know that you can take on more business and make more money, but let's say you've put everything on the line to get to where you are now, and it will take 3 months before that employee starts generating real revenue.
That's a quick $15,000+ drain on the bank account.
I don't know about you, but working with the feeling that there's a ticking time bomb about to explode is not the way to make good decisions about your business.
Steve thought the same thing - but based on his situation, many of the more reasonably priced products we like to offer to clients were unavailable to Steve.
What are Daily Payment Loan Interest Rates?
The rates on daily payment loans vary, but range in price from high interest rate products to stupidly high interest rate products.
(Put it this way, if the rate makes a difference.... the loan is probably a bad idea).
The rates depend on a few factors, the most important being:
1. How long you've been in business
2. How many deposits you get per month in your bank account (more = good)
3. Your credit
Let's look at a six month daily payment product. For easy numbers we'll pretend you are borrowing $10,000.
For one of the cheapest products available, you'd pay back $12,000.
For one of the more expensive products on the marketplace, the numbers are more like $14,000 to borrow $10,000 when all is said and done.
If you calculate a daily payment loan like the bank calculates it, as an APR, the interest rate on the "cheap product" comes out to 78%.
The more expensive product, when calculated as an APR, ends up giving you an interest rate of about 147%.
In What Universe Would it be OK to Pay 147% on a loan?
So, first off, our pal Steve is no moron. He builds awesome websites, which makes him way smarter than a lot of people.
In Steve's case, he couldn't pull the trigger on hiring an employee without the loan. Having a $15,000 loan for 6 months is going to cost Steve roughly $4,500 in financing costs.
Not hiring the employee would mean Steve missing out on about $60,000 in extra profit during 2015.
So, in Steve's case, the only thing worse than having a really bad interest rate loan would be not having a really bad interest rate loan.
So, if you're considering a business loan and don't have cheaper options available, these products can be an option, but you have to be really careful in evaluating whether or not the numbers pencil out.
S0, Crazy-High Interest Rate Business Loans aren't Bad?
The problem really isn't that high interest rate loans exist, because in some situations, like for Steve, they do make perfect sense.
The real problem is how these loans are usually sold.
Can you imagine having to have a job selling this product to people? You'd get in trouble if you don't follow the sales script, which is carefully crafted to convince you, the small business owner, that the sky is green and your grass is blue.
Here's how the product is normally presented, on many of these company's websites, or if you call them on the phone after you get that junk mail that says,
"Congratulations! Based on your short time in business and lousy credit, you've been PREAPPROVED for up to $150,000 in working capital!"
Here's the pitch:
Unfortunately, I would be fired from one of those companies, since here was my "sales pitch" to Steve:
In Steve's case, since there was no way in which we could work the numbers in which he didn't end up better off taking out an expensive loan, Steve decided to move forward.
What to Look for When You Take out a Business Loan
When you are looking to borrow money, your best bet is to deal with somebody who has the ability to offer you a number of different products - and will offer you a less expensive option if one is reasonably available.
Secondly, you're going to want to deal with someone who won't pretend expensive money isn't expensive.
The truth is this: if you have no options other than paying high rates, and the money you receive will be used to make substantially more money than you end up paying back, then these high rate products can be an ok idea - but go in with eyes wide open so you can make the best decision for your business.
Do you want good advice on whether a daily payment loan is a reasonable product for you - or if there are better options? You may call us at (800) 786-5696 or click on the picture below.