Congressman fears fintech lending could hurt small businesses

Fintech lending has grown in recent years, revolutionizing the small business lending market by leveraging AI technology and data analytics.

While fintech lenders bring a number of benefits to small businesses, enabling them to borrow money quickly and efficiently, when traditional bank borrowing wasn’t the easiest task, it’s not without its challenges.

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



Congressman fears fintech lending could hurt small businesses

To highlight the challenges, Hon. Dean Phillips, a Member of the House of Representatives, made a statement of fintech and transparency in small business lending.

Phillips expressed concern that fintech lenders could take advantage of small businesses and the self-employed.

He notes how during the Paycheck Protection Program, the Committee on Small Business witnessed how developments in technology, aka fintech, made small PPP loans to small businesses, particularly those in underserved communities, more effectively than traditional banks.

The congressman goes on to say that while fintech lending has helped many entrepreneurs, fears that industry practices could target and harm small businesses are escalating.

Credit terms not always clear

Phillips said the terms aren’t always clear for small businesses because many online lenders provide little or no upfront information about the loan or product to potential borrowers.

“For example, the speed at which fintech lenders are providing capital can come at a significant cost. A traditional bank loan typically has an APR of 4 to 13 percent. For fintechs, the APR for online loans and other financing products can start at 7% and rise to over 100%,” he warns.

predatory practices

The congressman also warns of the predatory practices of some fintech lenders putting 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 spiraling debt spiral,” says Phillips.

The Member of the House also notes how many MCA lenders require borrowers to sign an obscure legal instrument in order to receive the money. “By signing, borrowers waive their legal rights in relation to any litigation that may arise,” he says.

confession of the court

The legal tool is known as a judgment plea to get the money. According to Dean Phillips, if a court enforces the verdict’s admission, it locks a small business in “this unsustainable debt loop and eventually forces it to close.”

The lack of transparency in fintech underwriting is another concern for small business advocates, says Phillips. Data and algorithms driving automatic underwriting can pull disjointed information, e.g. For example, who an applicant follows 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 says.

Dean Phillips concludes the statement by urging Congress to keep up and ensure industry practices don’t unfairly exploit entrepreneurs as the fintech sector grows.

It is important that small businesses looking to borrow money are aware of the exploitative practices of some fintech lenders and do sufficient research and legal advice before committing to borrowing.

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