Small-Business Lending in America is broken. There are hundreds of alternative lenders who are offering short term cash and daily debit products with APR’s with a whopping price tag of 40-200 percent, and short amortizations that force borrowers into multiple renewal cycles.
Billions of dollars are being lent annually, and there is an economic bubble waiting to burst which will be bad for our economy and terrible for unemployment. Entrepreneurs typically create 2/3 of all new jobs. The interest rates that so many of them are paying are simply unsustainable.
A vibrant and fair system of access to capital for entrepreneurs is critical to all of our economic future. So what can we all do now to make a difference? I would argue that many larger businesses should consider taking some short term economic pain, in order to enjoy long term gain.
The alternative lenders are happy to spend billions of dollars on marketing and advertising each year. They have the margins to afford it. And publishers are happy to take the money. The term “small business loan” can collect $40/click.
Banks are profiting also. The core principle of banking is that banks are supposed to take deposits, and turn around and lend to businesses in their community at reasonable rates so that they can create jobs. Now it’s become acceptable for the nation’s top banks to create massive warehouse lines for the short term lenders, and the money goes into the market at exorbitant rates.
Credit card processors’ are making untold fortunes promoting these loans over the last few years. I haven’t reviewed the financials, but these large multi-billion dollar enterprises are delighted with the cross-sell revenue. In many instances, they and the brokers will add 12 points to a loan, or increase a borrowers cost by 1/3, without the borrower even realizing it.
Many small-business non-profits are benefiting also. We’re seeing partnerships formed between some of the most respectable NPO’s and very expensive lenders.
Promoting small-business lending is not like offering up staplers or office supplies. If a small-business buys a wrong stapler or pays an extra 50 cents for one, it will not have a material impact on their business. But a bad loan decision can cause long term pain and incredible frustration.
There is an urgent need for education around the concept of a path to bankability for small-business owners and entrepreneurs. It’s understandable that at some stage of evolution a business will not be bankable. But with the right guidance and direction a business can get there over time.
What can we do, both individually and in out respective businesses to prevent this bubble from bursting? What can we do to help solve the problem instead of being a direct or indirect part of it?