Congressman Worries Fintech Loans Could Harm Small Businesses

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

While fintech lenders offer small businesses a number of benefits, namely enabling them to borrow money quickly and efficiently when traditionally borrowing from banks has not been the easiest task, it is not without its challenges.

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

Congressman Worries Fintech Loans Could Harm Small Businesses

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

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

He notes how during the Paycheck Protection Program, the Committee on Small Business witnessed how technological advancements, known as fintech, made small-dollar PPP loans to small businesses, particularly those in underserved communities, more effective than traditional banks.

The congressman continues that while fintech loans have helped many entrepreneurs, concerns are escalating that practices in the sector could harm and harm small businesses.

Lending conditions not always clear

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

“For example, the speed at which fintech financiers deploy capital can incur significant costs. A conventional bank loan usually has an APR of 4 to 13 percent. For fintechs, APR for online loans and other financing products can start at 7 and rise above 100%,” he warns.

Predatory Practices

The congressman also warns of the predatory practices that some fintech backers can use that puts small businesses at risk. He alludes to how Merchant Cash Advances allow lenders to receive a fixed percentage of future sales until the financing is repaid.

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

The MP also notes how many MCA lenders require borrowers to sign an obscure legal instrument to obtain the money. “By signing, borrowers waive their legal rights in relation to any legal dispute that might arise,” he says.

Confession of Judgment

The legal instrument is known as a confession of judgment to get the money. According to Dean Phillips, when a court enforces the verdict’s admission, it locks a small business into “that unsustainable debt cycle and eventually forces them to close”.

The lack of transparency around fintech adoption is another concern for small business advocates, Phillips says. Data and algorithms that govern automatic underwriting can retrieve unrelated information, such as who follows an applicant on social media or the number of criminal records in an applicant’s zip code.

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

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

It is important that small businesses looking to borrow money are aware of the exploitative practices of some fintech lenders and do adequate research and obtain legal advice before committing to taking out loans.

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