The Dangers of Working with the Wrong Lenders

TL;DR

The wrong lender will cost you more than a bad customer ever will. The signs are all in the contract - most operators don't read them.

Four lender types to avoid completely: factor-rate MCAs, predatory online lenders, ISO/broker mills, and confession-of-judgment lenders.

Three contract red flags that mean walk away: confession of judgment, daily/weekly debits, and personal asset liens beyond the standard PG.

The right lender pitch is boring. If it sounds urgent and amazing, it's the wrong one.

The first thing to know: not every lender is on your side

There are good lenders. There are also predators. The difference between them is not always obvious - both will call you back, both will say yes when others have said no, and both will email you a contract.

The difference shows up in the math, the contract clauses, and the structure of the deal. By the time you've signed, it's too late to spot the difference. The job is to spot it first.

The four lender types to avoid

Factor-rate MCA companies.

A merchant cash advance prices itself with a factor rate - a number like 1.35 or 1.45 - instead of an interest rate. They do this because the equivalent APR is so high that no one would sign if they wrote it plainly.

A factor rate of 1.4 on a $100K advance means you owe $140K. If that gets paid back over 9 months through daily debits, the equivalent APR is roughly 90%. Over 6 months it's roughly 130%. Over 4 months it's over 200%. Bank loans at the same time charge 8 to 12 percent. The MCA is up to 25 times more expensive.

The pitch always sounds like: Funded in 24 hours. No collateral. No FICO check. All of which is true. None of which makes it a good deal.

Predatory online lenders.

These are platforms that look modern, have nice websites, and lend at rates between 35 and 80 percent APR. They're often regulated as commercial loans (which means consumer protection laws don't apply). They prey on operators who would qualify for bank rates but don't know how to access them.

The tell: the rate isn't on the homepage. Pricing only appears after you've given them your bank statements, your tax returns, and your social security number. By then they've already started underwriting and the salesperson is on the phone.

ISO and broker mills.

An ISO (Independent Sales Organisation) is a non-bank loan broker. Some are legitimate (we are an example of a legitimate broker - though we don't take commission from you, only from the bank on funded deals). Many are mills that take your application, shop it to 30 lenders simultaneously, generate 30 hard credit pulls in a week, and stick you with whichever lender pays them the highest commission.

The tell: they ask for your authorisation to pull credit before they've shown you a term sheet. They charge you a fee on top of the lender's fees. They push hard for the close before you've had time to read the documents.

Confession-of-judgment lenders.

A confession of judgment (COJ) is a clause in a loan agreement where you waive your right to defend yourself in court. If you miss a payment, the lender can file the pre-signed judgment in any state and seize your bank accounts, AR, and assets — without telling you first.

COJs are illegal or restricted in most states, but loan agreements are often signed under New York law specifically because New York permitted them broadly until 2019. Some MCA companies still slip them into contracts hoping you won't notice.

If you see confession of judgment anywhere in your loan agreement, walk away. There is no legitimate reason a lender needs that clause.

The three contract red flags

Even within an otherwise reasonable loan, there are three contract terms that should make you stop:

Red flag 1: confession of judgment. As above. No exceptions.

Red flag 2: daily or weekly debits. A real loan is paid monthly. If the lender wants to debit your bank account every day or every week, they are not lending you money - they are buying your future receivables (an MCA structure). The cost is many multiples higher and the cash flow effect will choke you.

Red flag 3: personal asset liens beyond the standard PG. A standard personal guarantee on a small business loan means you're personally on the hook if the business defaults. A predatory lender goes further - they want a lien on your house, your vehicles, your spouse's accounts. Read the security agreement. If they're taking more than the business assets and a normal PG, they expect you to default.

What a real lender's pitch sounds like

Here's the thing about good lenders: they are boring.

A real banker calls you back when they say they will. They want to see your last two years of tax returns and an interim P&L. They take three to six weeks to underwrite. They issue a term sheet that describes the rate, the term, the security, and the fees in plain English. They don't pressure you. They don't promise anything before underwriting is complete.

If a lender's pitch feels urgent, exciting, or amazing - it's the wrong lender. The right one feels like a slightly tired credit officer doing their job carefully.

The rule of thumb: the boring lender is the cheap lender. The exciting lender is the expensive one. The math doesn't move; only the marketing does.

What to do if you're already in a bad deal

Most operators reading this have been here. Or are here now. The path out is the same in every case:

Stop. Take no new debt. The instinct is to take a second MCA to pay the first. Don't. Stacking is the fastest way to insolvency in a trades business.

Get the contracts in front of someone who reads them for a living. A small business attorney or a Frank advisor can tell you what's enforceable, what's negotiable, and what your real obligations are.

Refinance with a real lender. MCA refinance is what we do most often for operators in trouble. A bank-rate term loan replaces the daily-debit MCA, restores your cash flow, and saves your business.

Build a relationship before you need the money next time. The right time to find a good lender is the day after you don't need one.

If you're trying to figure out whether you're in a good deal or a bad one, our MCA refinance calculator shows you the real APR you're paying. If the number scares you, refinance.