Sometimes in business the difference between getting through a tough time and closing the doors for good can come down to speed and ease of access to capital. Depending on the terms, this can be a lifesaver for a business, or it can be the anchor that drags them down to the depths of inescapable insolvency.
One situation we are seeing too frequently now is known as predatory lending, where a person or institution lends money with an expectation of failure and a view to liquidate the borrowing entity.
Predatory lending practices within the business lending industry can have devastating effects on borrowers. In New Zealand, like in many countries, business owners often rely on loans to start, or expand, their businesses. However predatory lending schemes have emerged as a serious concern as some lenders take advantage of vulnerable borrowers leaving them at risk of losing everything they have worked for.
Predatory lending refers to the unethical practices used by certain lenders to exploit borrowers for financial gain.
These lenders often target desperate business owners with inadequate credit histories, limited access to traditional financing options, or insufficient financial literacy. They offer loans with excessively high interest rates, hidden fees, and deceptive terms, intentionally trapping borrowers in a vicious cycle of debt.
Warning signs of predatory lending
- Excessive interest rates: Predatory lenders often charge exorbitant interest rates, well above the market norm. They prey on borrowers who are willing to accept unfavourable terms due to their urgent need for funds.
- Hidden fees and penalties: Predatory lenders commonly hide additional fees and penalties within complex loan agreements, leaving borrowers at a disadvantage and unable to fully grasp the extent of their financial obligations.
- Pressure tactics: Lenders resort to high-pressure sales techniques, coercing borrowers to make hasty decisions without fully understanding the terms and conditions of the loan.
- Unreasonable collateral requirements: Predatory lenders may demand unreasonable collateral that significantly exceeds the loan’s value, putting borrowers at risk of losing their assets if they default. Often in ‘high risk’ lending it is at this point where the business owners personal assets become intermingled with company securities, and in some recent cases, a business owner’s parents’ house was also secured against the questionably prudent lending.
- Lack of transparency: Predatory lenders often provide incomplete or misleading information, making it difficult for borrowers to make informed decisions about their financial obligations.
- Lack of independence: Strong links or shared ownership with liquidators and insolvency practitioners – we have found proven links between certain lenders and liquidators that have a much higher rate of liquidating borrowers than the majority of lenders in the sector. We have even found evidence of accountants lining their clients up for such lending in exchange for a referral fee or other incentive.
Protecting yourself from predatory lending
- Research loan options: Thoroughly research multiple lenders and compare their offerings, interest rates, fees, and terms. Seek advice from trusted financial experts, such as accountants or financial advisors. Before agreeing to any kind of lending to ‘save’ the business, you need to establish whether the business is indeed ‘saveable’, or are you just going to prolong and worsen the pain.
- Read and understand loan agreements: Carefully read and understand all terms and conditions of the loan agreement before signing. Don’t hesitate to seek legal advice if anything seems unclear or suspicious.
- Identify red flags: Be wary of lenders who pressure you to accept unfavourable terms or demand collateral that exceeds the loan’s value. Trustworthy lenders will always provide transparent information and answer your questions.
- Develop your financial literacy: Strengthen your financial literacy skills to better understand loan agreements, interest rates, and potential risks. Educate yourself on various financing options available to business owners in New Zealand.
- Seek help from regulators: If you believe you have fallen victim to predatory lending practices, report the lender to the appropriate regulatory authorities in New Zealand, such as the Commerce Commission or the Financial Markets Authority.
Conclusion
Predatory lending poses a significant threat to New Zealand business owners, potentially leading to financial ruin and loss of hard-earned assets. By familiarising yourself with the warning signs, conducting thorough research, and seeking professional advice, you can protect yourself from falling victim to these predatory practices.
It is crucial to promote responsible lending practices that prioritise the long-term success and well-being of business owners, ensuring a thriving business environment in New Zealand.
Just remember when you are struggling in the depths don’t just grab any rope that is thrown to you before seeing whether it is connected to a life raft, or to an anchor.
Just a thought
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