Over the last 5 years I have managed an SBA Microloan Program at a non profit in Indiana. Our microloan program helps startups and small businesses that are unable to secure traditional bank financing. Recently I have watched the explosion of daily payment loan products offered by alternative, online lenders like:
- OnDeck Capital
- And many, many more
What are Daily Payment Loans?
First, a daily payment loan is just what it sounds like. Many of these online lenders might offer a business $20,000 that they can apply for and access within 48 hours. These loans typically have short terms 3 to 18 months, and the business makes a small payment every single day, or maybe every day the business is open. The interest rates on these loans are typically high, but you are paying for a very quick turnaround and a unique repayment structure with daily payments.
Why Daily Payment Loans can be Great?
These loans can be great for small businesses. For example, let’s say you are a restaurant and your walk-in refrigerator dies, you have to shut down the business. You must act fast, you can’t afford to shut down for a month while you apply for a traditional loan from a bank. You are losing business, momentum and profit every day you are shut down. In this situation a daily payment loan is perfect. You can get cash fast, and you can pay it off each day over the next 12 months with a small payment. This works well for a restaurant because a restaurant generates sales each day, so coming up with a small payment each day actually matches the cash flow of the business.
Why Daily Payment Loans can be Dangerous?
Now recently I have noticed some of my clients who do not have daily cash flow businesses, taking out daily payment loans. For example, let’s say you are a contractor and you get paid in big chunks as you complete projects. It is very dangerous to take out a daily payment loan because you don’t generate cash each day. What if your customer pays you a little bit slower than normal? You might not be able to make your payment each day. I have noticed that some of the smaller, unknown alternative lenders are making daily payment loans to businesses that don’t have daily cash flow. This seems very dangerous for the lender and very dangerous for the business owner.
Understand your Cash Flow Projections
As a business owner you must be careful not to simply take out a loan that doesn’t fit your business cash flow just because it is fast and easy. That is a great way to go out of business. These online lenders will likely take all business assets as collateral and if you stop making those daily payments because a customer is paying you 30 days late, the lender may come in and start taking their collateral.
My suggestion – Spend some time with ProjectionHub and create a cash flow projection and play around with different scenarios, will you be able to make your loan payment even if customers pay you late?