In my first post on this topic (Stacking), I chose to go the route of kitchen analogies because, well, I was thinking about my mom and because there is so much that goes on behind the click-bait ease of these loans that I didn’t want folks to get bogged down with all the finance-geeky details that I thrive on. I like to keep things simple.
Today I want to use a real life scenario. Imagine:
You are a business owner experiencing a cash flow crunch. You need to an influx of cash – probably to meet payroll, a tax or insurance payment.
You talk to your banker. You do not qualify for a loan. Your banker refers you to another financing source – a factor, PO funder, AB lender. In order to be considered for financing, these companies need “stuff” from you – financial statements, bank statements, tax returns. You just don’t have the time to pull all of that together. You need cash NOW.
So stressed out you can’t sleep, you are sitting at your computer at 2am when an ad pops up that all but begs you to click on it by promising same day loan approval. You give into the impulse and click. Well holy cow, you can get money wired to you by noon and all you have to do is answer a couple of questions, click a few boxes.
Sure, you know this is going to be expensive, but can that really matter at this point? You tell yourself that if you don’t get the money now, it will be disastrous and if you can just get through this crisis, you can figure out the rest another day.
You carefully read the pricing structure for daily payments that will be debited from your account. You tell yourself that it makes sense. It is far easier to make sure you have $50 in your account every day for the debit than to ensure that you have $1,000.0 available on any given day for a monthly payment.
As if by magic, the money appears in your bank. Whew – bullet dodged. Within days, the daily debits start. It is manageable and you move forward in your business.
The thing is; there is always another crisis, another situation that comes up that requires an influx of cash. Weeks or months later, you find yourself clicking again. And again. What started as a small and manageable daily payment of $50 is now $150, $200, $500. Not only is this almost impossible to sustain for any amount of time, you are now in a vicious cycle of working to pay the finance companies , not for all of the reasons you went into business – your passion, your family, your lifestyle.
Last April in Scottsdale at my big annual conference, a colleague from Texas shared a story of a long standing client who had 9 stacked loans. The total loan amounts exceeded the annual revenue of the company. That company is now out of business.
In Las Vegas a couple of weeks ago, another colleague told of a company with 15 stacked loans, also exceeding the total annual revenue. While it has not happened as of this writing, my guess is that company will be shut down soon.
I was recently talking with a good friend who is my go-to bookkeeper. One of her clients just lost their business under the weight of stacked loans.
Remember a decade ago when no doc mortgages were all the rage? Stated income, adjustable rate and neg-am loans? Countless people bought into the hype that the bubble would never burst; that as long as you could afford the payment with the teaser rate, it didn’t matter that you did not know if you would be able to afford the “real” payment after the rate adjusted. Consumers somehow believed that months and years later, something would happen that would magically make it OK. Remember how that worked out?
The lessons we are still learning from the mortgage meltdown are why stacking is so dangerous. Having such easy access to money with little or no understanding of how the products work is not ending well for business owners.
I get it. I do. I, too, have felt resentful at times when I had to provide endless paperwork to complete a financial transaction. I, too, shot myself in the foot many times in the early years, taking the “easy” way of hard money loans because I either did not qualify or didn’t want to have to deal with the reality of my situation by having to answer hard questions.
Taking the time to answer the hard questions is what moves us forward
The hidden costs of our decisions often have nothing to do with money.
Keeping things simple doesn’t always mean making it easy,