Looking For Working Capital? Beware Of These Types Of Lenders

Not all lenders are focused on helping entrepreneurs grow, like Merchant Capital. Unfortunately, many lenders don’t have your best interests at heart. With reckless lending and overindebtedness becoming more common, it’s crucial for business owners to carefully evaluate potential working capital providers. Here’s what to look out for when choosing a lender:

What is Irresponsible Lending?

A lender who leaves you over-indebted or fails to ensure you understand the terms of your loan is engaging in irresponsible practices. Be cautious of lenders who:

• Eagerly offer funding without assessing your ability to repay.
• Provide more money than requested, especially if you’ve exhausted other funding options.
• Fail to conduct thorough assessments like credit checks or understanding your financial situation.

An example from the UK highlights a borrower who overstated his income and approached nine different lenders before securing funding. Proper credit checks would have revealed that he wasn’t qualified, but the lack of due diligence led to irresponsible lending.

At Merchant Capital, we ensure responsible lending by conducting thorough credit checks, reviewing bank statements, and providing offers that are realistic and affordable. Our Pay-As-You-Trade model aligns repayments with your income, ensuring that your business remains financially stable.

Does the Lender Act Ethically?

It’s essential to understand whether a lender operates ethically. Ask if the lender belongs to any regulatory body that holds them accountable. Avoid lenders who:

• Don’t regulate their interest rates or loan amounts.
• Encourage loan stacking—offering funding despite knowing you already have multiple loans. This could lead to a debt cycle that harms your business in the long term.

Merchant Capital is a member of the South African SME Finance Association (SASFA). SASFA has created a code of conduct to ensure ethical and sustainable lending, offering guidance on responsible practices and risk assessments.

Questions to Ask When Choosing a Lending Partner:

• Is the lender a member of a reputable regulatory body?
• Do they request turnover records (bank statements, etc.) to understand your finances?
• Do they consider your cash flow health and profit margins before offering funding?
• Do they perform relevant credit and supplier checks?
• Do they have a proven track record in the industry?
• Do they have your business's best interests at heart?
• Are they transparent about the total cost of the loan?
• Do they offer repayment options that align with your income trends?

The Bottom Line

Lending is often an emotional decision, but it’s vital to think beyond the immediate need for cash and consider the long-term relationship with your lender. Merchant Capital is committed to helping businesses grow through sustainable, transparent lending practices. To start growing your business with the right lender, contact Merchant Capital today.

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