Did you know that predatory small business lending is so bad that in 2015 a group organized to develop a Small Business Borrowers’ Bill of Rights? It is that bad. And if you read the “rights” small business borrowers ought to have, you can get a pretty good idea of what to watch out for.
1. The Right to Transparent Pricing and Terms
The bad guys trick small businesses with confusing or missing disclosure of how much a loan is going to cost, and what can trigger more fees or higher interest rates.
2. The Right to Non-Abusive Products
It’s astonishing that this even needs to be said. But the bad guys do at least eight things they shouldn’t:
- create “debt traps” by extending more credit when it can’t be repaid
- hide prepayment charges
- provide the wrong debt product for the business need
- use high pressure sales tactics
- delay prepayment assistance
- provide poor complaint management
- secretly refer prospects to other lenders
3. The Right to Responsible Underwriting
Small businesses often assume that if a lender provides a certain size loan or line of credit, that they ought to be able to pay it back because, hey, these are smart people in the business, right? Unfortunately, there are financial motivations to provide more debt or the wrong kind of debt at high prices. Unscrupulous lenders and business loan brokers can provide irresponsible underwriting:
- providing more debt than can be repaid
- in particular merchant cash advance providers sometimes don’t verify that the company can repay the debt
- some bad guys don’t report the timely repayments to business credit bureaus, only defaults.
4. The Right to Fair Treatment from Brokers
Did you know that commercial loan brokers are in the business of guiding small businesses to lenders? And that some of them are the very same people who used to be mortgage brokers guiding consumers to excessively large mortgages before the Great Recession? Fintech marketplace company Fundera has widely written about this problem (here and here among others). Sometimes unscrupulous business loan brokers:
- don’t show all or the best loan options, just the ones that give the brokers the highest commissions
- don’t tell the small businesses that they are getting compensated, or how
- don’t disclose what the brokers’ customers actually end up receiving
- use high pressure sales tactics rather than education about options
- charge even when no loans are provided
- lack a responsible complaint management system.
5. The Right to Inclusive Credit Access
Discrimination happens. It shouldn’t. The bad guys don’t pay attention to the Equal Credit Opportunity Act.
6. The Right to Fair Collection Practices
Debt collectors hired by the bad guys apparently are not paying attention to the Fair Debt Collection Practices Act either.
If you are unnerved by this list, that’s good. The fringes of small business lending include shady characters and untrustworthy companies who are doing things that are completely legal but unethical.
This is not a new development. If you want an historical perspective check out the Wikipedia history of Usury. Debt is an ancient form of capital, and money lenders have, shall we say, a colorful history.
Perhaps the Fintech revolution will ultimately change this state of affairs. Now, however, it’s the “Wild West” with some Fintech lenders aligning with commercial loan brokers as a major distribution channel.
We’ll be digging into this issue more in the future.