As an important engine of the U.S. economy, small businesses have a huge influence. But where can small business owners get the capital they need to grow? Traditional lenders are an option, but construction loan company George Bailey’s “It’s a Wonderful Life” image may not reflect reality. New online options may expand the availability of credit, but they also raise some consumer protection concerns. This is the subject of Strictly Business: The FTC Small Business Financing Forum, and you’ll want to read the new FTC staff perspective on the topic.
According to statistics from the Federal Reserve, 32% of small businesses applied for online financing in 2018, up from 24% in 2017 and 19% in 2016. Many lenders are new to the market. Some companies base their underwriting on financial technology and alternative data. Additionally, payment processors and technology platforms have entered the space, offering financing based in part on what they already know about small businesses from credit card receipts or sales data. Other players include nonprofit microlenders that seek to provide affordable loans to underserved borrowers.
It’s not just “who” is new. “What” may also be new. Online companies offer a wide range of products. Some involve a fixed fee rather than interest, or may require weekly or even daily repayments. Then there are the short-term options that typically cost more for merchant cash advances. MCA providers purchase a fixed amount of a small business’s future accounts receivable. Businesses must repay the advance plus a “factor” – usually 20% to 50% of the amount. Daily payments may increase or decrease based on daily sales.
Employee Perspectives lists some of the potential benefits of online financing. Providers facilitate a simpler application process through customizable terms. Additionally, because they may be making decisions based on immediate sales data (rather than the business owner’s personal credit score), the company may extend credit to borrowers who may have been denied in the past.
But there are also consumer protection considerations. You’ll need to read the employee perspective for a deeper dive, but here are some of the questions tagged on the forum:
- Information is inconsistent. Non-traditional products may offer different terms and terminology. Do these differences create inconsistencies that make apples-to-apples comparisons more difficult?
- Consumer confusion. A related concern is whether small business owners have grasped the essence of the new product. “But they’re in business,” some said. Yes, but their understanding of the terms may be more similar to that of a consumer in a personal credit transaction. In a Federal Reserve staff study, business owners expressed confusion about costs and often underestimated how much they would have to pay. Employee Perspective discusses how state legislation and self-regulatory regulations attempt to address these issues, and how the Federal Trade Commission Act’s prohibitions on deceptive and unfair conduct will apply.
- Concerns about merchant cash advances. Forum panelists and others expressed a number of concerns about MCAs: 1) Some businesses in desperate need of quick financing may have difficulty repaying MCAs, which can have projected annual interest rates as high as triple digits; 2) MCA providers and the brokers they use Merchants and lead generators may use misleading practices to promote their products; 3) When daily sales decline, some MCA providers may not make promised “adjustments” or reconciliations to reduce merchant payments; 4 ) Some Providers and their agents may engage in potentially abusive collection practices. One particular concern raised by panelists: Some in the MCA industry require property owners to sign a deposition of judgment, a document waiving their right to contest any lawsuit to collect unpaid amounts or fees. You’ll want to read the Employee Perspective for more details.
Have your small business ventsEntering the online financing market? If you have experienced questionable practices, the FTC wants to hear your story.
