By Ed McLaughlin and Wyn Lydecker

I’m a huge proponent of bootstrapping, as I’ve mentioned a previously.  I completely understand, however, that not everyone who wants to start a business is in the same position. If you’ve figured out that borrowing is what you need to do to get your company off the ground, just beware. All borrowing options are not created equal.

It appears loan sharks are starting businesses as bank alternatives.  Bloomberg Online has written a thorough article detailing this new development. New businesses are popping up in which the owners offer financing to borrowers with bad credit at rates of up to 134%. When the money can’t be repaid, the lender seizes the borrower’s assets. These subprime business loans are not guaranteed or protected by any agency, and small business owners are winding up with far less than they started with.

These smaller-scale tragedies may indicate a larger-scale disaster is waiting to happen. The larger banks that are lending to these new subprime lenders and bundling those loans into saleable securities. Sound familiar? Replace the word loan with the word “mortgage,” and you’ll understand what is happening.

The words you might be looking for to warn you off a suspicious deal may be hidden behind the new vocabulary of this rising industry. Instead of “subprime,” lenders prefer “alternative” to describe their loans. In fact, rather than “loan,” the words “short-term capital” are being used. Even “interest rate” has hidden behind a new face: “money factor.”

At present, subprime business loans add up to $3 billion. There is no licensing requirement for this new type of loan. These loans have set sail as a massive ship with an unlicensed crew and no regulatory captain. That doesn’t bode well for passengers, who may be hearing the first strains of “Nearer My God to Thee.”

Rather than contribute to that Titanic waiting to happen, seek out reliable loans. Consider microloans from nonprofits like those who work with Kiva, where ordinary people contribute a $25 loan and track its impact all the way to the moment it is repaid. That sounds small, perhaps, but it adds up. Loans can be up to $50,000.00 and still be considered micro.

The Small Business Administration (SBA) offers microloans through over 200 agencies across the US. Most are targeted to certain types of businesses or business owners, so it may take some looking for the right fit. But it’s better to spend the time up-front than to spend the money afterward.

The thing about financing is that it is cumulative. It’s much easier to start well and maintain than recover from a fall. The microloans available cannot be spent to repay existing debt. As Entrepreneur.com says in its guide to microloans, “The loans can be best for startup companies with lower capital requirements and limited operating history. Microloan borrowers may benefit from the intermediary’s expertise in business.”

The take-away here is to be careful. Loan sharks capitalize on people’s desperation and inexperience. Don’t let yourself get there. Choose your financing with an eye to the future when you are starting up. If you need to take more time to start up, so you have time to save and can rely less on external sources, take the time. It’s better to take the time up-front and do your homework than to pay with your very livelihood later.

Ed McLaughlin is currently co-writing the book “The Purpose Is Profit: Secrets of a Successful Entrepreneur from Startup to Exit” with Wyn Lydecker and Paul McLaughlin.

Copyright © 2014 by Ed McLaughlin All rights reserved.