Predatory Small Business Lending Concerns Voiced at Federal, State Hearings

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The push for more fairness and transparency within the non-traditional business lending industry was recently brought to the attention of policymakers on Capitol Hill and at the Illinois State House.

As we recently covered, predatory lending to small business owners is of growing concern now that entrepreneurs are increasingly relying on the unregulated, alternative lending market to borrow under the $250,000 threshold needed for most traditional bank loans.

The lack of regulation and oversight of the alternative business lending industry has allowed several bad apples to emerge and take advantage of business owners – particularly in lower income and high-minority communities – with exorbitantly high interest rates, hidden fees, and other unreasonable penalties that make repayment difficult.

A panel discussion on Capitol Hill, spearheaded by the advocacy group Small Business Majority, zeroed in on how educating business owners and regulating the alternative lending market are two needed strategies to prevent businesses from taking out loans with predatory terms. Small Business Majority Founder and CEO John Arensmeyer was joined by representation from Accion Chicago, Fundera, and the Aspen Institute to raise awareness about what Arensmeyer called the “wild west” of business lending.

“It’s crucial that small business owners have protections in place and a way to separate trustworthy lenders from bad actors,” said Arensmeyer.

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The Illinois State Senate Financial Institutions Committee recently convened a hearing on predatory small business lending. (Getty Images)

Meanwhile, the Illinois State Senate Financial Institutions Committee convened a hearing on predatory small business lending and the lack of access to capital for business owners. During the hearing, Chicago Treasurer Kurt Summers called for new state legislation to protect business owners from becoming victims of alternative lending schemes that are not in the best interest of the borrower.

The legislation suggested by Treasurer Summers would require transparency in loan terms and prevent fee traps, among several other steps to protect small business borrowers.

“Chicago’s small business community deserves protection from the unchecked greed of predatory lenders,” Summers said. “While access to capital is the number one concern of small business owners across the state, bank and commercial loans continue to decline, steering [business owners] to underhanded lenders. As we continue to urge banking partners to increase their local investment, this new, common-sense legislation would ensure transparency in lending that so often puts our entrepreneurs at risk.”

If state legislation emerges from the ongoing discussions in Chicago, it would likely mirror many of the same stipulations that are in the national Small Business Borrowers’ Bill of Rights, a pledge that NLC recently endorsed that pushes for more transparency in the alternative lending market.

City leaders can begin to understand the scope of this issue in their own communities by surveying business owners about their credit usage, talking to businesses about their borrowing needs, and informing business owners about their borrowing rights.

We are curious to know about the landscape of access to capital in your city. Are their credit barriers for business owners? Is predatory lending on your radar as a potential issue? Share your story with us.

About the Author: Emily Robbins is the Senior Associate of Finance and Economic Development at NLC. Follow Emily on Twitter: @robbins617.