Unaffordable and Unsustainable: New Business Lending
On the heels of the Great Recession, a new breed of “alternative” lenders has emerged to offer small businesses much-needed access to credit. These new lenders are filling a void created after banks dramatically cut back on their lending to small businesses.
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While some of these new alternative lenders are responsible companies that use new technologies to lower costs and deliver affordable and fair credit, the majority are peddling short-term and high-cost products that subject borrowers to opaque and often draconian terms, steep repayment obligations, and astonishingly high annual interest rates.
These alternative lenders operate in a regulatory void. Some avoid state usury laws and other regulations by claiming their debt product is a “cash advance,” rather than a loan. And while there are federal regulations governing consumer loan products like credit cards and mortgages, no such protections exist for commercial loans, even in cases where the business is a sole proprietor who has no greater financial sophistication than the average American. The result of this trend is that a growing number of small-business owners are accruing debt they can never repay, falling into debt traps that bear a striking resemblance to the destructive cycle of payday lending.