Have you heard of the “Gangster Loan?” My guess is you have not. The “Gangster Loan” is the name given by a client of ours that took out one of those business loans you hear and see advertised on radio and TV. The gist of the deal is “We can approve you in 24 hours or less” and loan you up to $250,000. It’s that easy!” You call and get excited when they tell you that you’ve been approved for $105,000 of funding and the funds are available in 48 hours. Their representative says, “I will send you the package, as soon as you’ve signed everything – we are ready to go.”
The papers are emailed to you. You scan them, say to yourself, “this must be the standard language,” and you sign the docs and take the money. You see they are going to debit your bank account daily for an amount that seems high – but you are so excited (and typically desperate) for the cash that you say to yourself, “I can handle it.” The following week, your account is debited $1,500 per day – $7,500 per week according to the loan documents.
A quick web search of “Fast Business Loans” reveals no less than 16 companies that are aggressively offering these programs – all with tempting ads, nice logos, and enticing websites.
What you don’t see in theses commercials and what you ignore when “scanning” the documents is the interest rate they are charging you, that you are giving them an all asset lien on your business assets and you and usually your spouse are guaranteeing the loan. Worse yet – the loan documents usually include a “Confession of Judgment” signed by your company, you and your spouse (if you have guaranteed the debt) and provide that New York, California, or Utah law applies and that if you fail to make a payment, you have consented to be sued in that state and the creditor can enter the Confession of Judgment against you before you have any opportunity to defend the lawsuit.
After a week of your account being hit for $1,500 per day, you realize – you don’t have any cash flow to pay your regular bills. The cash you borrowed – you used to either pay off existing debt or catch up on bills. When you finally look at the loan documents more carefully, you discover that in exchange for $100,000 of cash, you have agreed to pay back $155,000 – paying it at a rate equal to 24% of your monthly receipts – which if paid in 6 months, would equate to 48% interest and if paid in 3 months would equal 72% interest! You read on and see if you fail to make a payment, they can sue you out of state and enter judgment against you out of state. You call your attorney and ask, “where do I stand”? The attorney looks at the documents and says, “not good.” They can sue you in New York (for example), immediately obtain a Judgment based on your Confession of Judgment, have it validated in Michigan and then seize assets. Your attorney says, “Why did you sign these documents without calling me first.” You pause, kicking yourself and say, “I blew it.”
These loans have two consequences. For the business owner who takes them out – they mean big trouble. Even if you can afford to pay them – you have been hosed to the extent of outrageous – “gangster” style interest. If you can’t pay them – your business and personal assets are now in jeopardy – and you must immediately seek help. On a market basis, these loans are called “subprime business loans” and many believe they represent the next economic disaster. The companies that are making the loans, bundle them together and then sell them in a securitized fashion to investors – in similar fashion to the mortgage crisis – which is generally credited for causing the Great Recession. Fed Chairman Jerome Powell remarked on this topic last week, as reported in the Wall Street Journal on May 20, 2019:
Views about the risks from rising corporate borrowing “range from ‘This is a return to the subprime-mortgage crisis’ to ‘Nothing to worry about here,’” said Mr. Powell. “At the moment, the truth is likely somewhere in the middle.”
Bottom Line – if you are thinking of borrowing on this basis (i.e. taking out a “Gangster Loan”) – STOP. DON’T DO IT. If you already “blew it” and made the mistake of getting into one of these loans – we do have viable solutions to get you out from the debt at lower cost and to preserve your business. Be careful though – you will find there are “predators” out there who are not attorneys and making all sort of claims to resolve the debt – but they are just another form of gangster – I call them the “Gangster Artist” and will tell you more about them in another Blast.
Have a great weekend. Also – check out our upcoming FREE Seminar on June 12th – “Debt Free is a Grand Slam to Win – Nothing is Better.” Details and sign up information are below.
P.S. Did you know that THAV GROSS offers free consultations for business, financial, and tax problems? Call us anytime – (248) 645 – 1700 or CLICK HERE to send us a message.