(USA TODAY) - If you run a small business, you’re likely seeing a flood of offers for easy-to-get loans — through direct mail, pop-up ads, even TV
ads — promising fast money to pay your bills or buy new equipment. But that new world of fast cash can come with some costly catches.
“It’s been the wild west,” said Karen Gordon Mills, co-author of a just-released Harvard Business School study exploring the promise and challenges of alternative small-business lending. The sector has exploded in the last few years as a new industry emerged, referred to as “fintech” (for financial technology).
Typically, to get a loan, a small-business owner needs to provide a bank with tax returns, personal and business financial statements and a pile of other documents and data. “You have to wait weeks or months,” said Mills, who co-wrote the report “Small Business Lending: Innovation and Technology and the Implications for Regulation” with Brayden McCarthy.
Moreover, there’s been a persistent “credit gap” — a dramatic lack of funds available for small businesses needing smaller amounts of money, less than $250,000.
Fintech lenders use more current, more digitized, information than traditional bankers. For example, with permission, they can directly access a company’s QuickBooks accounts. “You get your answer in minutes or hours, and you get your money in hours or days,” said Mills. “It’s transformative.” Because it’s easier to reach potential borrowers and to assess risk, they can profitably offer loans “even as low as $7,000 to $10,000.” Such loans have been virtually impossible to get from a bank.
But there’s a hitch. “No federal regulator has authority over small-business borrowing the way they do over consumer borrowing,” Mills said. “The Truth in Lending Act does not apply to small-business borrowers, so you don’t have transparency. Small businesses might not know what they’re paying.”
As a result, these new lenders can — and often do — charge sky-high interest rates and pile on fees, often hidden from the borrower. A short-term loan can turn into a long-term nightmare.
“There’s so much promise in the rise of lending to small-business market,” said co-author McCarthy, vice president of strategy for Fundera, an online lending platform. “It’s been ignored for a long time, but we want to make sure that disclosures are robust enough so borrowers know what they’re getting into.”