Congress must provide better regulation of alternative business lenders
© Greg Nash

Small businesses employ nearly half of the nation’s private sector’s workforce and drive the country’s growth. Yet, many of these businesses struggle to keep their doors open in the absence of reliably accessible and affordable liquidity sources. Traditional lending options fail to support small businesses due to costly infrastructure and reduced risk appetites. Community banks, once a prominent source of capital for small businesses, are no longer available for small businesses.  

Four decades ago, approximately 14,000 community banks across the nation served locally-based businesses. Since 1989, over two-thirds of those banks have shuttered, leaving about 4,000 community banks surviving. Their absence has resulted in less capital available in small business communities, particularly those in minority and disadvantaged communities. Into this void, alternative business lenders have aggressively entered the market to meet the underserved demand from small businesses for readily available capital. 

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In many cases, access to capital from alternative business lenders has provided small businesses the critical support they need to survive. But due to the absence of regulatory oversight over the alternative business lending industry, predatory lenders often take extraordinary advantage to reap profits at the expense of small businesses, employing deceptive practices to convince borrowers to accept loan terms they cannot afford or lure luring them into other terms that fail to appropriately finance their immediate capital needs because of unreasonably expensive repayment schedules.

Borrowers unable to repay their loans have been harassed by unscrupulous collections practices or subjected to aggressive confession of judgement clauses included in their loan contracts, financially wiping out not just their businesses but also the assets of their owners and families. Despite this reality, small business borrowers continue to enter into loan and merchant cash advance arrangements with bad actors because of their abilities to deliver quick access to liquidity without a clear understanding of their basic loan terms, including repayment schedule or interest, costs and fees.

The remedy for this is straightforward and can be implemented quickly, if Congress has the will to act and to enact legislation to protect small business borrowers. 

First, every loan and its terms should be clearly disclosed. Borrowers must be made aware of interest rates, payment schedules, prepayment charges, fees and costs and all information should be explained clearly and unambiguously in advance.   

Second, small businesses, when accepting loans from alternative business lenders and through brokers, deserve to trust their lenders and brokers as fiduciaries. All lenders and brokers should be subject to background checks and continuing education.  

Third, each small business must be provided with the most favorable loan product offered by a lender for which it qualifies and no alternative business lender should be permitted to make loans to small businesses that fail to offer them an economic benefit to help them finance their capital needs. Not only should every lender be expected to ensure these protections to a borrower, but every broker should be as well.

Once implemented, these regulations will create a sustainable marketplace within the alternative business lending community by allowing alternative business lenders committed to “best practices” to support growth and expansion for small businesses, while eliminating bad actors threatening these core aspirations. My firm, World Business Lenders, has voluntarily implemented a self-regulating structure to ensure our compliance with these same recommendations and we have continued to thrive in our industry as a result. We call upon all lenders within the alternative lending industry to implement our recommendations, as we have done. But until Congress takes the crucial step of requiring all alternative business lenders, including merchant cash advance companies, to comply, we will continue to hear more stories of predatory lending practices that have lured small borrowers into immediately accessing capital but have resulted in ruinous results for their companies.

Alternative business lenders have an important role to play in growing the small business economy and job market. However, in the currently unregulated environment, unscrupulous alternative business lending practices remain unchecked, to the financial detriment of small business borrowers and their entrepreneurial dreams. It is up to federal legislators to call for serious legislative measures that will introduce protections for small business owners from being financially exploited and destroyed by unregulated lenders and demand that these and all lenders offering loans in this market operate in an ethical, transparent and regulated manner or face penalties or other legal consequences. What we need is support from our leaders in Washington to promote much-needed reform in this industry.

Doug Naidus is the founder and chairman of World Business Lenders, an alternative business lender.