Congressman Worries Fintech Loans Could Hurt Small Businesses

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Fintech lending has grown in recent years, disrupting the small business lending market by leveraging AI technology and data analytics.

Although fintech lenders bring a number of benefits to small businesses, including allowing them to borrow money quickly and efficiently when traditional borrowing from banks has not been the easiest task, it is not without difficulties.

Small businesses should be aware of some of the issues that can arise when borrowing from fintech companies.



Congressman Worries Fintech Loans Could Hurt Small Businesses

To shed light on the challenges, the Hon. Dean Phillips, Member of the House of Representatives, issued a statement fintech and transparency in small business lending.

Phillips expressed concern that fintech lenders are taking advantage of small businesses and the self-employed.

He notes how during the Paycheck Protection Program, the Small Business Committee witnessed how technology aka fintech developments were making small dollar PPP loans to small businesses, especially those in underserved communities more efficiently than traditional banks.

The congressman continues that while fintech loans have helped many entrepreneurs, concerns are growing that industry practices could target and harm small businesses.

Loan terms are not always clear

The terms aren’t always clear for small businesses, Phillips says, with many online lenders providing little or no information to potential borrowers about the loan or product upfront.

“For example, the speed at which fintech lenders deploy capital can come at a substantial cost. A conventional bank loan typically carries an APR of 4-13%. For Fintechs, the APR for online loans and other financing products can start at 7 and climb above 100%,” he warns.

Predatory practices

The congressman also warns of predatory practices some fintech lenders may employ that put small businesses at risk. He alludes to how merchant cash advances allow lenders to receive a fixed percentage of future sales until the funding is repaid.

“The extremely high interest rates and daily repayments associated with MCAs can cause companies to spiral into spiraling debt out of control,” says Phillips.

The House of Representatives member also notes how many MCA lenders require borrowers to sign some obscure legal instrument to get the money. “By signing, borrowers waive their legal rights regarding any disputes that may arise,” he says.

Confession of Judgment

The legal instrument is known as a confession of judgment to obtain the money. According to Dean Phillips, when a court enforces the judgment confession, it locks a small business into “this cycle of unsustainable debt and ultimately forces it to close.”

The lack of transparency around fintech underwriting is another concern for small business advocates, Phillips says. The data and algorithms that control automatic subscription may extract unrelated information, such as who a candidate follows on social media or the number of criminal records in a candidate’s zip code.

“These underwriting practices lack transparency and have the potential to unfairly deny credit to protected groups or make these products more expensive,” Phillips says.

Dean Phillips concludes the statement by urging Congress to keep pace and ensure industry practices do not unfairly exploit entrepreneurs as the fintech sector grows.

It is important for small businesses looking to borrow money to be aware of the operating practices of some fintech lenders and to do sufficient research and legal advice before committing to loans.

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Image: Depositphotos


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