How to Protect Your Philly Small Business from Predatory Lending Practices

by Rachel Hazzard
September 20, 2024

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Funding is critical to the success and scalability of small businesses. Business owners need access to adequate funding for a variety of needs, including payroll, utilities, inventory purchases, and technology to name a few. Because financing is necessary for business growth, bad actors use predatory lending practices to take advantage of hard working small business owners. 

If you’re a small business owner, you must know how to recognize a predatory lender so you can avoid financial agreements with unfair terms. As Philadelphia’s public-private economic development corporation, PIDC is here to support business growth in every corner of our city and protect you from predatory business lending. 

What is predatory lending?

Predatory lending is the practice of using deceptive, unfair, or fraudulent lending practices to dupe borrowers into accepting unethical or abusive loan terms. Predatory lenders usually target vulnerable populations, including underserved small business owners who may have limited access to traditional financing options.

Spotting predatory lending

Recognizing predatory lending involves recognizing certain red flags and tactics used by lenders to take advantage of borrowers. Here are some common signs of predatory lending to watch out for:

High Interest rates & fees

Predatory lenders often offer loans at interest rates far higher than the market rate or include hidden fees buried in a contract’s fine print. If an interest rate is much higher than the market rate, this may be a sign of predatory lending.

Unclear & confusing terms

Loan documents can be difficult to understand, especially if you’ve never taken out a loan before. But if a lender’s contract is overly complicated or uses tons of jargon and confusing language, they may be trying to hide unfavorable terms.

Balloon payments

Predatory lenders often structure loans with “balloon” payments, where you start with low monthly payments followed by a large lump-sum payment at the end. This payment structure can be hidden in your contract and surprise you at the end of the loan, forcing you to refinance and end up paying more in fees and interest.

Bait & Switch

If you’re working with a lender who offers one set of terms initially but changes them at the last minute before signing, usually with higher interest rates or fees, be on alert. If the initial terms are too good to be true, they probably are.

Pressure

Taking out a loan for your small business is a big decision and you deserve time to thoroughly review the terms, compare offers, and consider any long-term impacts to your business. If a lender is pressuring you to sign a contract quickly without providing enough time for you to review the terms, that’s a red flag.

Loan flipping

Bad actors may encourage you to refinance their loan multiple times, often unnecessarily. Everytime the loan is refinanced, the lender charges more fees, costing you more while they rake in more revenue from fees and interest.

No credit check

For individuals with poor credit, hearing that a lender doesn’t need to perform a credit check can sound enticing, but beware. Lenders who do not perform credit checks or verify your ability to repay the loan may be less interested in your financial well-being and more focused on making a profit through penalties and late fees.

Protecting Yourself from Predatory Lenders

Make sure you do your research when looking for a loan. Use trusted lenders with a track record of small business support. When you’re conjuring signing a contract, thoroughly review the agreement and pay special attention to the interest rates, fees, repayment schedules, and penalties for missed or early payments. If you’re confused, concerned, or just want a second set of eyes to review everything, consult with a financial advisor, a lawyer, or a trusted professional to ensure you’re fully informed.

If you suspect a lender may be using predatory lending practices, you should report them right away. You can file a complaint with the Consumer Financial Protection Bureau (CFPB), which takes about 10 minutes. You can also submit a complaint to the Pennsylvania Office of Attorney General.

How can PIDC help?

If you believe you are currently stuck with a predatory business loan, PIDC may be able to help you. We offer debt consolidation for high interest credit cards, merchant service (point of sale) loans, and verified personal debt used to fund your business. We’ll also review hard money commercial loans. Fill out our inquiry form to learn more.

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