When you or your business is temporarily short on funds, a stretch loan is one possible solution worth considering. As the name implies, this type of loan "stretches" over a short-term financial gap until your income situation improves, allowing you to fulfill your financial obligations in the interim.
Stretch loans may also be referred to as Payday Alternative Loans (PALs) when given by federal credit unions.
These loans are usually sought from financial service providers where borrowers already have an established relationship and a good standing.
For everyday people, a stretch loan operates similarly to a payday loan-it enables the borrower to cover their daily living costs and other expenses until their next paycheck comes in. The idea is that, once the paycheck is received, the borrower will be able to settle the loan. Just like payday loans, stretch loan applications go through credit checks, only these are quite straightforward. Despite the resemblance to payday loans, stretch loans are less costly, with annual interest rates averaging 400%, depending on the regional laws. It's important to consider, however, that certain areas have prohibited or capped the interest rates on payday loans.
A crucial distinction between stretch loans and payday loans is the former charges less interest. The fact that stretch loans are normally restricted only to existing bank or credit union customers, who have already shown their ability to repay debt, influences this rate. The stretch loan's term for an individual normally lasts for a month but may be extended up to six months, if necessary.
Businesses can use stretch loans as a working capital for a short-term. For instance, a business that wishes to purchase new inventory but is yet to receive a significant amount of receivables might use a stretch loan to help with the inventory replenishment costs. Once the receivables come in, they can then pay off the stretch loan.
There are a few aspects to bear in mind about stretch loans. The maximum amount that can be loaned will be restricted by the lender. The interest rate will also tend to be greater than that of a regular working capital loan. One common reason why a small business may not have an existing working capital facility is the lack of adequate assets to use as collateral.
Stretch loans offer a temporary financial solution in pressing times; however, they tend to be more expensive than regular personal loans or working capital facilities. High interest rates are commonplace and application fees are often added. Therefore, before choosing a stretch loan, potential borrowers must ensure that they've thoroughly explored all their economical options, preferably from the same lender.
Everyone should note that a stretch loan is distinct from a senior stretch loan, which is a business loan amalgamating senior and junior (or subordinated) debt. Fundamentally used in leveraged buyouts, this type of loan primarily benefits middle-market companies.
Stretch loans indeed provide a short-term solution for bridging financial gaps. However, due to the high interest rates and charges, it is recommended to first consider other options, such as securing a personal loan from a family member or friend, or possibly utilizing a retirement account with a lower interest rate.