Voice of the Industry
Small-Business Loans at 40% Interest? Legally?
By Patrick Henry
Published: February 5, 2010
Have you heard about purchase-order financing? If a small business never gets to the point where word of this last-resort borrowing option reaches its desperate owner's ears, so much the better. But lately, the practice has become widespread enough to have attracted the attention of The New York Times, which devoted an article to purchase-order financing in its Sunday edition on January 31. “The Places They Go When Banks Say No” profiles one such lender, Hartsko Financial Services of Bayside, Queens. As a provider of purchase-order financing, Hartsko fronts money on behalf of cash-strapped business borrowers who have solid purchase orders ready to be fulfilled. This money pays for the manufacturing and the shipping, and after the lender is paid for the delivered goods, it conveys the proceeds, minus its fee, to the borrower. According to the story, the annualized interest on these loans can be higher than 40%. Because purchase-order financing is structured primarily for companies that resell products obtained from outside suppliers, its model—thankfully—doesn’t appear to accommodate manufacturing businesses such as printers. But to see this obscure (yet completely legitimate) practice popping up in the pages of The Times is to be reminded once again of how many barriers currently stand between small-business owners and capital from conventional sources. Banks, says the story, routinely reject applications for loans that were readily available just two years ago. Borrowers interviewed for the story freely admitted that after repeated turndowns by their financial institutions, the choice was between turning to purchase-order financing or turning out the lights. The article has triggered a lively discussion at “You’re the Boss,” The Times’s excellent small-business blog. (One of the comments is from the erstwhile owner of a graphics business who recalls his struggle to raise cash during “the desktop publishing revolution.”) “You’re the Boss” contains other, equally provocative threads about the capital drought, including one which posits that small businesses may not be quite as hungry for loans as is generally assumed.