Congressman worries that Fintech loans could hurt small businesses
Fintech lending has expanded in recent years, disrupting the lending market for small businesses by leveraging AI technology and data analytics.
Although fintech lenders offer small businesses a number of benefits, namely enabling them to borrow money quickly and efficiently when traditional bank loans have not been the easiest task, it is not without challenges.
Small businesses should be aware of some of the problems that can arise with loans from fintech companies.
Congressman worries that Fintech loans could hurt small businesses
To shed light on the challenges, Hon. Dean Phillips, a member of the House of Representatives, issued a statement on fintech and transparency in lending to small businesses.
Phillips expressed concern that fintech borrowers could take advantage of small businesses and the self-employed.
He notes how under the Paycheck Protection program, the Small Business Committee witnessed how developments in technology, also known as fintech, provided small-dollar PPP loans to small businesses, especially those in underserved communities, more efficiently than traditional banks.
The congressman continues that even though fintech loans had helped many entrepreneurs, there is growing concern that industry practices may be targeted at and harm small businesses.
The loan terms are not always clear
The terms are not always clear to small businesses, says Phillips, with many online lenders providing little or no information in advance to potential borrowers about the loan or product.
“For example, the rate at which fintech lenders can use capital at a significant cost. A conventional bank loan usually has an APR of 4 to 13 percent. For Fintechs, APRs for online loans and other financing products can start at 7 and climb higher than 100%,” warns he.
Predatory Practices
The congressman also warns about the predatory practices that some fintech borrowers may use that put small businesses at risk. He refers to how Merchant Cash Advances enables lenders to receive a fixed percentage of future sales until the financing is repaid.
“The extremely high interest rates and the daily repayments associated with MCAs can lead companies into a debt spiral that is not controlled,” says Phillips.
The member of the House of Representatives also notes how many MCA borrowers require borrowers to sign an unclear legal instrument to get the money. “By signing, borrowers waive their legal rights regarding any legal dispute that may arise,” he says.
Confession of judgment
The legal instrument is known as a confession of judgment to get the money. According to Dean Phillips, when a court enforces the verdict, it locks a small company into “the unsustainable debt cycle and eventually forces them to close.”
The lack of transparency around fintech guarantees is another concern for advocates for small businesses, says Phillips. Data and algorithms that control automatic underwriting can extract unrelated information such as who an applicant follows on social media or the number of criminal records in an applicant’s zip code.
“These warranty practices lack transparency and have the potential to unfairly deny credit to protected groups or make these products more expensive,” says Phillips.
Dean Phillips concludes his statement by urging Congress to keep pace and ensure that industrial practices do not unfairly exploit entrepreneurs as the fintech sector grows.
It is important that small businesses that want to borrow money are aware of the exploitative practices of some fintech borrowers and do adequate research and take legal advice before committing to taking out a loan.
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