How Payday Loans Can Harm Your Business and Ways To Avoid Them

How Payday Loans Can Harm Your Business and Ways To Avoid Them

Payday loans can easily get you caught in a debt trap. If you’re launching a startup and are strapped for cash, payday loans could be bad for your business.

Taking out payday loans has become increasingly popular. If a borrower takes out a loan for a short period, he or she is committed to paying off the loan by the next payday. That’s called a payday loan. They typically consist of small amounts, say $100 or $1000, that will be enough to cover any sudden expenses. It is not very hard to take out a payday loan, and getting the money doesn’t take much time, either. You’ll find several companies that handle documents online and quickly provide you with the funds.

Payday loans are paid off in one payment upon receiving your next paycheck. The company can directly withdraw the entire amount along with their fees and interest. To pay your total debt off, you need to have the full amount in your account. Otherwise, you might have to pay even more in late fees and other charges.

What to consider when taking out a payday loan for your business

Starting a business sometimes requires quick cash; you can consider taking out a payday loan for that. New companies don’t have a credit history, making it hard to get a business loan. You can take out a payday loan relatively quickly and get access to the funds within a very short time. Creditors rarely ask why you’re taking out a payday loan, letting you use the money any way you see fit.

All kinds of borrowers can take advantage of payday loans—even borrowers with poor credit. People with a bad credit history find it hard to get a loan from conventional lenders. In those cases, they have to turn to payday loans.

How can payday loans harm your business?

Based on what we’ve discussed so far, taking out a payday loan can seem like a great option. However, they may harm your business in the long run. Let’s find out how.

1. Credit score damage

Although payday loans aren’t meant to damage your credit score, it may end up that way if you cannot stick to their terms. Typically, you are expected to pay the debt off within two weeks. If you don’t make full payments in time, it can lower your credit score. They’ll also create a new credit account for you in that case.

2. Forces you into a debt cycle 

Each time you take out a payday loan, you’re risking getting caught in a debt cycle. This is one of the primary concerns you should be mindful of. You need some quick cash today, so you take out a payday loan. When the time comes to pay the debt, if you don’t have the necessary amount, you’re in trouble. Once you’re in that position, things can get much worse. They’ll continue to charge you interest, late fees, and other charges. So, don’t opt for a payday loan if you don’t have a steady flow of cash.

3. You might face problems getting a business loan in the future

Before you take out a payday loan, consider your credit score. Credit rating for your business can also be affected by taking out a payday loan. Payday loans themselves do not reflect on your credit score. When you try to consolidate a payday loan, it shows up as a hard inquiry on your credit report, which damages your credit score.

No two companies are going to interpret your credit score the same way. How they’re going to calculate it might not be exactly the same, either. So, different companies may have different impressions based on your credit score. You’ll find that some companies don’t have a favorable view of taking out payday loans. They also do not consider borrowers who take out payday loans as reliable. This may make it hard for you when it comes time to take out a business loan in the future.

When is taking out a payday loan a bad idea for your business?

Taking out a payday loan isn’t cheap. Payday loans come with very high-interest rates, often going up as high as 400 percent. Then come the charges and the fees. There are different kinds of expenses involved with payday loans, which vary from lender to lender. Taking out a payday loan can cause you a lot of trouble and headaches. So we advise you not to take out this loan if you’re even a little bit unsure about being able to pay your debt in full and on time.

Taking out a payday loan is a bad idea if you’re already struggling with debt. If you have other loans, deal with those before you think about taking out a new one. You should not go for a loan if they charge high-interest rates. Not only is it not worth it, but also it is potentially harmful.

If it’s possible, it’s always best if you can save up for significant expenses. If you can’t do that, you can choose to ask for money from your friends and family. It would help if you only select an option that won’t hurt your credit history or your business in any way.

How can you avoid payday loans for business?

If you need quick cash, consider these alternatives to payday loans.

Borrowing from friends and family

You can choose to borrow from friends or family. However, it’s best if you do the agreement in writing.

Invoice financing

If you have a small business and need some quick money, you can opt for invoice financing. This process lets you borrow capital against your accounts receivable amount. The loan doesn’t take long to get processed. The lender can decide in a matter of minutes and provide you with the loan within a day.

You might find it a little similar to payday loans in certain respects. The most significant difference is that they don’t charge you nearly as much as payday loans.

A business line of credit

You can also opt for a business line of credit. A lender gives you a credit limit, and you can withdraw as much funds from it as you may need. Just like a credit card for businesses, you’ll be paying interest on the amount you use. You can qualify for a short-term business line of credit easily, and the funds are also provided quickly. This makes the business line of credit loans a very good alternative to payday loans.

Short-term loan

If the above options don’t work out for you, you can consider taking out a short-term loan. These loans typically require you to pay them off within a year. You need to make payments frequently, and their interest remains high. But not as high as payday loans. You’ll be able to qualify for them relatively easily.

Business credit cards

If your credit score is not below 580, you’ll be able to apply for a credit card for business. Their rates are lower than business payday loans. In addition to that, they also offer 12 months zero percent intro APR period. But you’ll have to make sure that you’re making the full monthly payment on time. This is one of the best options available in the market if you need cash flow or some credit.

How can you repay business payday loans?

As discussed earlier, it is so easy to get trapped in a cycle of debt with payday loans. For example, you take out a payday loan because you need quick cash. What if you don’t have enough money at the time of repayment? You may feel the need to take out another loan. This vicious cycle can continue if you don’t know how to get out of it. If you’ve fallen into this trap, we advise you to resolve the issue by taking out a payday consolidation loan.

If you’re wondering how to consolidate payday loans, you should know that it is a relatively simple process. You pay your high-interest payday loan in one go by taking out another loan. Then you pay off this new loan with a relatively lower interest rate by making monthly payments. You can pay off your debt consolidation loan over a more extended period in fixed installment amounts.

One of the best aspects of consolidating a payday loan is that it keeps you in total control of your finances. Free from the worries of any other entity taking steps in this regard. However, you should have a clear understanding of all you’re required to do when you take out such a loan.

You will qualify for a debt consolidation loan only after the lender ensures your creditworthiness. However, if you’re taking out payday loans, it isn’t likely that you have a good enough credit score. So, you might find it difficult to qualify for a debt consolidation loan. You’ll find that payday consolidation loans are also given when the borrower doesn’t have a good enough credit score. But the only caveat, in that case, is that you’ll have to pay higher interest than otherwise.

How to consolidate your payday loans

Here are a few different methods to explore that can help you consolidate your loans.

Apply for a balance transfer card 

You can pay off your payday loans using a balance transfer credit card, but you need to qualify first. This option makes sense because the interest rates in credit cards can go as high as 33 percent, whereas, with payday loans, it remains somewhere around 400 percent. Not only do you have to pay less interest, but it reduces your hassles drastically.

If you’ve taken out multiple payday loans and you have to make multiple payments every month, then this balance transfer card can simplify things. After you pay off the payday loans, you’ll only have to worry about making one payment every month.

Taking out a personal loan 

A personal loan is a type of loan that needs to be paid off within a short term. Generally, you can pay it off within a year. These are classified as unsecured loans, and you don’t have to worry about paying high-interest rates.

Getting a Payday Alternative Loan or PAL 

Credit unions offer Payday Alternative Loans. You have to be a credit union member to take advantage of it. They offer drastically lower interest rates. PAL loans offer repayment options extending up to 1 year, although that’ll depend on the type of PAL loan you’ve taken.

Payday loan consolidation and debt settlement. Which one should you go for?

If you compare payday loan consolidation and debt settlement, you’ll surely find that it is indeed better to consolidate your debt rather than to settle it. There are many risks with debt settlement that are not there with debt consolidation. Debt consolidation affects your credit score. Besides that, you have to pay a lot to the debt consolidation company you’ll work with.

Debt settlement is the process where your creditor settles for an amount that is less than the total amount of money owed. The remaining part of your debt is written off. However, you still need to pay taxes on the forgiven amount, which is considered as income. The damage to the credit score, the enormous fees, the taxes you need to pay, and the other headaches associated with it make it a poor option overall. You should only go for it if paying off your debt in full is not an option at all.

Can a payday consolidation loan affect your credit score?

Although it is not likely that a payday loan will have any effect on your credit score, a payday consolidation loan may. What impact it will have on your credit score will depend on how you’ve handled the payday consolidation loan.

At the very beginning of your payday loan consolidation process, the credit score will decrease for a concise amount of time. Also, adding the payday loan consolidation to your account further brings down your credit score. However, later on, you can make it better by following the below steps:

  • You make payments for your debt consolidation loan on time.
  • You keep your credit balance low in other accounts
  • You’re not borrowing money unnecessarily.

The final verdict

You’ll find that payday loans do more harm than good, and we cannot advise that you opt for one. If you find yourself overwhelmed with debt, you should seek the help of a credit counselor. We recommend that you try to avoid taking out a payday loan for your business. However, you can make an exception if you’re sure that you can pay it off on time. Otherwise, you risk getting caught in a debt trap, and the hassles that follow may become truly hard for you.

Lyle Solomon has considerable litigation experience as well as substantial hands-on knowledge and expertise in legal analysis and writing. Since 2003, he has been a member of the State Bar of California. In 1998, he graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, and now serves as a principal attorney for the Oak View Law Group in Los Altos, California.

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