Many business owners are bombarded with offers.
Many small-business owners are seeing ads for loans everywhere they look, promising quick cash that can be used for purposes such as purchasing equipment or paying suppliers.
The offers come from a new breed of companies in the financial technology, or fintech, industry, Rhonda Abrams writes in an article for USA Today. Among the many firms in the space are Prosper, OnDeck and FundBox.
These loans solve certain problems, but they can also bring some serious disadvantages, Abrams writes.
One reason such loan can be attractive is that they are often available in smaller amounts — even the $10,000 range. In many cases, traditional banks are only interested in dealing with much higher amounts, Abrams explains.
Additionally, the loans can be quick and easy. Traditional banks often need extensive documentation and can take many weeks to come back with an answer. Fintech firms can use digital methods to evaluate a potential borrower, even accessing QuickBooks accounts if granted permission, and have an answer almost immediately, according to the article.
But Karen Gordon Mills, co-author of a new Harvard Business School study of such alternative small-business lending, is quoted saying that the loans often carry very high interest rates, and the fee structures can be far from transparent.
In some cases, annual percentage rates can exceed 300 percent.
“No federal regulator has authority over small-business borrowing the way they do over consumer borrowing,” she said.
Mills and her co-author are calling for “a streamlining of existing regulation” in order to allow alternative lending to continue but also protect small-business borrowers.
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