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A Sustainable Way Forward for Online Lending

In mid-April, the Federal Reserve Bank of New York released findings from its 2016 small business credit survey, which asked more than 10,000 small business across the country their opinions on lending institutions. One of the big takeaways? Small businesses really don’t like online lenders.

In fact, loan applicants were more satisfied with loans from large banks (61% satisfied and 15% dissatisfied) than from online lenders (46% satisfied and 19% dissatisfied). And why don’t borrowers like online lenders?

  1. 33% said high interest rates

  2. 19% said unfavorable repayment terms

  3. 17% said they waited too long for a decision on their credit and 26% cited the difficult application process (in both of these categories, online lenders performed better than both small and large banks)

  4. A whopping 49% said lack of transparency

The Epoch Times has more about that lack of transparency. Essentially, online lenders that cater to small businesses have “slipped through the regulatory cracks.” There is no clear federal entity that licenses or regulates them because they’re not banks, and small business owners don’t have the same kinds of protection available to individual consumers, because businesses are assumed (sometimes erroneously) to be more financially savvy than your average man on the street.

This means online lenders that work with businesses don’t have to comply with the same transparency laws as online lenders that work with individual consumers. Many online lenders take advantage of this by including misleading language and obfuscated terminology in their loan agreements. Hence nearly half of borrowers being frustrated with the lack of transparency in online lending.

A lack of transparency can lead to predatory lending practices

Recently we spoke with an entrepreneur who had just taken a merchant cash advance (MCA) from an online lender. MCAs are short-term loans originally designed for brick-and-mortars like retail or restaurants. They have daily or weekly payments and are priced with a factor rate rather than an APR (similar to the repayment caps we use at Lighter Capital). Comparing a MCA with a factor rate to a traditional loan with an APR is like comparing apples and oranges, which helps lenders disguise the true cost of the merchant cash advance.

This founder was happy about his MCA, as it allowed his startup to get out of a tight spot. He was less happy when we walked him through calculating the effective APR on the loan and it turned out to be 175%.

If the lender who provided this merchant cash advance had acted transparently, this prospect would have been able to compare that loan to others more easily.

Lighter Capital and Transparency

At Lighter, we believe in sustainable lending. That means no predatory fee structures, no outsized interest payments, and a dedication to responsible underwriting and low loss rates.

That’s why we signed the Small Business Borrowers’ Bill of Rights. This agreement was created by the Responsible Business Lending Coalition, which is committed to promoting responsible practices and combating irresponsible and predatory lending to our least protected sector, small business owners.

The full text of the Small Business Borrowers’ Bill of Rights is here, but here’s the overview:

  1. The right to transparent pricing and terms

  2. Transparent rate

  3. No hidden fees

  4. Plain-English terms

  5. Clear comparison

  6. The right to non-abusive products

  7. No debt traps

  8. No “double dipping”

  9. No hidden prepayment charges

  10. Appropriate product

  11. Pressure free

  12. Prompt prepayment assistance

  13. Responsive complaint management

  14. Clear notice regarding referrals

  15. The right to responsible underwriting

  16. Believe in the borrower

  17. Alignment of interests

  18. Right-sized financing

  19. Responsible credit reporting

  20. The right to fair treatment from brokers

  21. Transparent loan options

  22. Transparent broker fees

  23. Transparent results

  24. Empower borrowers to make informed financing decisions

  25. Disclosure of conflicts of interest

  26. No fees for failure

  27. Responsive complaint management

  28. The right to inclusive credit access

  29. Non-discrimination

  30. The right to fair collection practices

  31. Fair treatment

  32. Responsible oversight

  33. Accurate information

Like the other signatories of the Small Business Borrowers’ Bill of Rights, we believe that a transparent and fair system is more sustainable than one built to maximize lenders’ profits at the cost of borrowers’ success. We see ourselves as aligned with the companies we fund, both financially—the faster they grow, the better our performance—and ideologically. After all, we’re a startup, too, and we get excited when we see a startup solving a thorny problem in an inventive way.

In 2017, Lighter Capital will be working hard to increase borrowers’ trust and satisfaction in online lenders. If you have any questions about our process, the Small Business Borrowers’ Bill of Rights, or how our revenue-based financing compares with other debt financing structures, please reach out. We’d be happy to answer your questions.


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