Right now, you’re probably thinking to yourself, “Inflation? Is here? At best, they’re confused.”
We accept that inflation sounds counterintuitive given how low interest rates are. But we’re talking about a kind of inflation that’s easy to overlook when you only consider the macro view of inflation.
After the Great Recession, the U.S. government clamped down on community banks and other institutions that lend to small and lower middle market businesses. However, the need for capital among these companies has not, and will not, go away. These businesses may have issues tied to the last recession or have growth opportunities that are legitimate needs for capital, but the banks aren’t there for them because of regulation in the market.
Currently, our country is faced with the situation where small and lower middle market businesses need capital, but the traditional source of funds is severely restricted. As tends to be the case with supply and demand, these businesses will find capital somewhere, and that is with a new group of lenders at interest rates higher than ever before.
Herein lies the problem: if you’re the one paying high interest rates, even if the macro economy might not be suffering inflation, you are.
This level and type of inflation is particularly challenging for small business, including $10MM and $20MM companies. Newpoint has recently seen interest rates between 40-100%. However, because inflation isn’t happening around the macro economy, there is no asset appreciation, price increases, etc. to help offset the high interest rates. It’s incredibly difficult for a business to work itself out of this position. If they don’t quickly change how they’re operating, the company ends up liquidating.
Important things to remember about this difficult environment:
Predatory lending in the form of merchant credit accounts and other usurious loans is the fastest growing lending market in the country. It’s not just happening to your neighbor and your competitor, it’s happening to you.
Struggling small and lower middle market businesses with imperfect credit are at the highest risk to fall victim to these predatory lending practices. Rejected by ABLs and/or traditional lenders, they turn to the usurious lender. A UCC filing is placed on the assets and a personal guarantee is secured from the owner. For several different reasons the current/traditional lender is never informed of the loan. This lack of knowledge puts both the company and the relationship at risk and ultimately creates a micro-economical inflationary environment that everyone is now a part of.
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If you’re concerned you have a client involved in a usurious loan, please don’t hesitate to contact us. Fast and swift action will ensure the best possible outcome.