When It Makes Sense to Pay 76.5% Annual Interest

Gene Marks

The good news is that since the Great Recession of 2009, bank financing has become more available. The bad news is that the requirements are still pretty tough — particularly if you’re a small business.

If you want a loan from a traditional bank, the money’s there at reasonable interest rates — but you’ll more than likely need to produce solid collateral, reliable historical financial statements, personal guarantees, and a strong assurance that you can meet debt maintenance and other financial covenants. Still, the money’s there if you can qualify.

There’s also capital available at community and independent banks, which have increased in popularity and offer a good alternative to the giants. But don’t get too excited — these are still banks, and their requirements are not so different from the major institutions.

If you run a store or restaurant, then it may interest you that retail payment services like Square and PayPal offer their merchants cash advances based on their sales. Even some retailers — like Sam’s Club and Staples — have gotten into the small business lending game and offer loans to their members.

Then there’s another alternative: online lenders.

Led by companies that include StreetShares, Kabbage, Fundbox, and Bond Street, the online banking industry has exploded over the past few years, and the reasons are pretty obvious. Many of these services loan amounts as low as $5,000 to companies with as little as $60,000 in revenues, and often provide the cash on the very same day. Wow, right? But, like all good things, there’s also a catch: According to this recent summary from financial blog NerdWallet, interest rates can range from 6% to 76.5% a year.

Wait…what? 76.5%…a year? Is that a misprint? Nope. It’s true and it’s legal. What insane business owners would do this? Oh, I know a few — and they’re not as insane as you think.

Here’s one example:

John owns two coffee shops in my home town (the guy’s real and so is his story, but I’ve changed his name for this article). Things were going well and about a year ago he had the opportunity to lease space at a new, prime location for a third store. There was a lot of competition for the space and the landlord required a heavy security deposit — first, last, and an additional month’s rent — paid in advance to secure it.

John knew that the location was a moneymaker so long as he could get it. Unfortunately, so did a few other competitive merchants. The landlord gave John just 24 hours to come up with the cash, but unfortunately he didn’t have it all. What to do? A traditional bank would’ve taken at least a few days to approve this funding, if not more. So he went to an online banking service and had the funds in his account that day.

This lender charged about 40% annual interest. Did John pay that? No. He only borrowed the money for a couple of weeks from the online lender until a more formalized long-term line of credit with his bank could be established and then he paid off the online lender. Sure, he paid a steep interest rate for that period of time, but not for the entire year. In return, he was able to put the money down on the property and secure a prime downtown location.

He’s still there today. I recommend the mocha cappuccino.

Sometimes I meet business owners who shy away from online lenders or even from taking advances from their credit cards because they’re spooked by the high interest rates. They should be. Their concerns are reasonable.

But those interest rates are only insanely high if you maintain that debt for a long period of time. Don’t do that. But do consider these sources of financing if you need the cash right away and your intention is to pay it back within…say 30 days. Yes, you’ll pay a premium for the money. But at least you’ll have the money.

And if, like John, you can still realize a profitable return on investment — even when factoring in the higher financing costs — then you’ve made the case. Sure, 76% interest is super-high. But the cost of losing out on a long-term moneymaking opportunity is much, much higher.

Would you consider taking out a short-term, high interest loan for your small business?

14 Responses to "When It Makes Sense to Pay 76.5% Annual Interest"

    • Chris Bugg | December 18, 2017 at 6:47 pm

      In my first business venture this was my only avenue to get started in business for myself.
      I did it but the rate was 29% and no I only kept the loan for 6 months because I was starting a company that depended on my alone and I had no business experience, I was a major risk. I have been self employed ever since, so it was startup capital well spent.

    • Kittredge | December 18, 2017 at 7:24 pm

      Recently I received two offers of loans with an interest rate of 299%. There will be other offers, in all probability, with the same excessive rate. We refer to that rate as usury.

      This gouging should not be legal, in my opinion.

    • Robert Boff | December 18, 2017 at 8:33 pm

      Coffee shop guy has 2 shops and can’t come up with 3 months rent? I’d examine cash flow before I’d open shop #3.

    • Sandy | December 19, 2017 at 2:43 am

      This is an example of very bad business planning. Business owners should anticipate potential cash needs and put in place some sort of credit line at normal interest rates. Borrowing at high interest rates is a good way to kill a business

    • NY Business Owner and former Paralegal | December 19, 2017 at 10:42 am

      It is my understanding that although the story sounds nice it doesn’t sound legal. Those interest rates equate violation of Federal Law by the lender under racketeering statutes. To charge anyone an outrageous interest rate such as those in the article and the comments, would be similar to loan sharking which is illegal under Federal Law. I do want to say that Gene Marks gave a few chuckles with his wit so reading the article was not a total loss. Happy Holidays and if you don’t celebrate anything, Happy Year End . . . I hope 2017 was profitable for all!

    • Nathan | December 19, 2017 at 1:00 pm

      This “article” was linked to within the same email that had an ad just below the headline labeled “Sponsored By Fundbox™.” If you are going to write an article that is blatantly a paid advertisement, you should at least disclose that somewhere in the article. I’m going to be more skeptical of all Small Biz Ahead articles in the future.

      • extramile | December 20, 2017 at 9:25 am

        This article was not sponsored by Fundbox. –Elizabeth

    • Joel Rosenberg | December 19, 2017 at 9:23 pm

      Don’t have this problem.

      If I need money I collect from customer’s

      We have lots of open account to regular customer and over 7 digits out there one week is more than enough time.

    • Dane Owen | December 19, 2018 at 9:51 pm

      Who is paying you to post this? The normalizing of what in the past would have been criminal interest rates should not be justified. This article gives really bad advise. If you are not prepared to be in business at the get go you will not be ready for the unexpected that comes next. Loan sharks charge less. This article should instead be warning small business owners of dangers of these predatory loans.

      • Elizabeth Larkin | December 20, 2018 at 1:07 pm

        Thank you for your feedback, Dane.

    • Joe Black | December 20, 2018 at 9:51 am

      It is interesting that so many people fault the guy for his action, even though it did work out for him. Sure, everyone should have 6 month to a year of personal cash or liquidity as a safety net. Do you, not many do. Some for stupid reasons and some because they are risk takers and producers. I imagine if you look at many of these ultra successful start ups, you’ll find that many were where this guy was at some point in the game. If it weren’t for these risk takers, our world in the US would look much different. As to the legality, I cannot say. My thoughts were that Usury laws were for the public consumer and not necessarily for businesses. Loansharking works because people cannot get money through legal way, not because of the interest rates, the “juice” as it were. For those people there is no other choice, and most of them are in that shape because of their own bad decisions, not to expand a going business. And, the banks that are referenced here will take your business if you don’t pay, not your limbs or life. It would be interesting to see something on the legality of these type loans.

    • Tom Mavor | December 20, 2018 at 10:19 am

      Interesting to read the responses of people. The fact is the fee that most people pay on traditional loans is much higher than the interest rate quoted. I also think you missed the point about opportunity costs. I costs more money in lost opportunity than it does to pay the high fees. Here is a conservative view of the situation.

      I have a traditional Line of Credit I can call on at a moments notice it Costs me $150 / year just to have it on stand by for up to $50,000. It also cost me some fees to set it up, but we will leave those out of the equation for now.

      If I borrow $10,000 use it for 30 days to fund securing a premium location — I am paying 8% plus the $150 — which works out to $217 total for 30 days. If my math is right that is about 2.17% a month or annualized it is 26%. — so essentially if I don’t borrow any other money that year I paid a rate of 26% — higher if you add in the setup costs.

      Why would I do that? As a business owner I recognize I don’t pay interest rates, I pay cash to settle debts. If my projection is that the location is going to realize me a better return — it is worth it almost at any price to secure the location. Say i decide it is going to net return conservatively a $100 / month more for the next 5 years than any another available location — my added return is $6,000 on a $217 investment — if you look at rates that is a 350% a year return on the $217 — you can see that even if I doubled that cost to $450 the return is still significant on a modest increase in the return. Since in retail / particularly coffee shops — locations is the highest differentiation between success and failure — I would be insane not to give my business every chance to succeed.

      In the question about cash flow — the issue in the story was immediate need. I plan where every dollar is coming from and going over a period of time. Sometimes there are opportunities or requirements you don’t expect. If you are holding cash in reserve — and it is not working for you then it is costing you money. You can’t always bring it together immediately. There are lots of times where I need $50,000 for payroll one day and get paid $100,000 the next day. The next day isn’t when I need it. So it costs me money for one day to borrow $50,000 — cash is always moving in a business — you should not be overly concerned with rates when you need money short term.

      • Hannah Sullivan | December 21, 2018 at 9:56 am

        Thank you for your response, Tom.

    • Steven Montgomery | December 20, 2018 at 11:25 am

      I have been in business for 35 years and occasionally use other people’s money for different things. I have looked at many options and most of these companies charging these high interest rates are insane.
      Also many companies charge an origination fee for this very reason. They do not want to lend money for a very short term even at a high interest rate, just to have it paid off in a month or two and make very little. So they charge the upfront fees to get there money immediately. Be aware of this as you are looking around.
      There has to be a better option for people that do not want to give their first born to the bank to secure some funding or to pay loan shark rates to a company that will break you. Somewhere in the middle where there is a reasonable rate for a reasonable term with reasonable fees up front. Does anybody know of such a place?

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