How would you feel if you found out that the financing you’ve wound up with isn’t what your lender promised?

From MCAs to business credit lines, lenders have designed a long list of funding products for small and medium businesses. But not all products are okay for every financial need.

Speaking to PYMNTS, Flo Capital Co-founder Ryan Ridgway feels there’s often a bait-and-switch trick that most lenders use to lure business.

How Bait-&-Switch Works

According to him, loan providers can “dangle the carrot” with a particular product, only to sadly offer a retailer a different product, which might not fit their needs.

For instance, Ridgway feels lenders are out to drag businesses into MCAs. This product has attracted bad press, much like payday loans did.

However, he notes that MCAs aren’t naturally meant to harm borrowers. For certain businesses, merchant cash advances can be a valuable tool in growing your business and a way to fund operations.

The challenges begin when an enterprise with thin margins is forced into MCAs under the pretense of cheap funding.

For example, borrowers from the transport or construction sectors are hardly the right fit for cash advances because they experience a low deposit frequency.

“Such businesses are duped into these per-day payment plans with exorbitant rates which turn out more harmful than helpful.”

Other possible dangers happen when a company uses deceptive marketing language only to offer a different product. According to Ridgeway, lenders use low rates as a means to attract an SMB’s attention.

The Remedy

Often, small businesses don’t know the exact type of product they want for their specific situation.

 Lenders must now build products that fit specific business situations and offer a better funding experience that goes beyond speed and digitization. Honest terms and issuing the right product are crucial in providing funding that will indeed benefit businesses.

According to Ridgway, lenders must make an effort to train borrowers, and loan brokers must be more responsible when marketing loans.

Final Words

Using bait-and-switch tactics can harm small businesses trying to survive with little resources. To improve the lending environment, loan providers and their agents must be held accountable for their actions.

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