A common question we get is this…
Why don’t some private lenders allow you to capitalise the interest on your loan, for example, six months? ("Capitalise" is a term also known as "Pre Pay")
The reason being is because these short term business loan lenders have the lowest entry rates for the first month of the loan. This is attractive to brokers and borrowers, and it looks good in theory, however these lenders know full well that your client can’t afford the payments, as it will destroy their cash flow. Next thing ..... you know it, your client is paying over 8 times the entry level on the first month’s interest.
In other words, you think you have a great deal by getting the short term business loan at 1.5% per month, but interest only prepaid for the first month. After that, you either service the interest each month or you are placed into default and paying the default rate of 12% per month.
They dangle a carrot, so to speak, of a cheaper rate for the first month as a sweetener, but then once your client inevitably defaults, they are in a LOT of trouble – This is called entrapment folks!
HomeSec Business Finance on the other hand, understands that some businesses are asset rich with poor cash flow, so we ask you questions, such as…
- How long will it take to build and sell the house?
- How long will it take from when you purchase the stock to sell it for a profit?
We then say, let’s prepay the interest for the duration of the short term business loan so that once you have finished your project, you can pay us back in full.
Going with these other cow boys is akin to heading to your local pub for dinner, ordering the lamb, only to find that after you've taken your first bite, you realise it is mutton!
We don’t like to get too caught up in negativity and the shonky practices that occur in our industry, but we also feel it is our moral responsibility to educate brokers about the potential dangers for their clients. Just today we’ve had another finance broker inform us a lender who has done this to their client.
At the end of the day, this is why we have so much repeat business at HomeSec, because we don’t seek to pull the wool over your eyes. However don’t be like a lot of brokers who have to learn this the hard way.
As we sign off, take 2 minutes to watch our short video below, which has a couple more little things to be wary of.