Mark Newman needed some fast cash last October to keep his small Studio City wine-importing business afloat. He went to his main bank but was rejected for a loan because of his relatively low sales.
So Newman, 61, turned instead to an online lending company called OnDeck. After submitting a handful of bank statements, he was quickly approved for a $65,000 loan, which allowed Newman to cover his wine shipments and keep his business running.
All good, right?
Wrong, says Newman.
“These loans are predatory by nature,” he told me. Think payday loans for small businesses, he said, with interest rates well over 30%.
OnDeck is representative of a new breed of online lenders known as financial-technology firms, or “fintech,” that have found a niche making money available to small businesses quickly and with minimal hassle.
Just as payday and car-title lenders pat themselves on the back for meeting the needs of cash-strapped consumers, these online lenders pride themselves on being there when small businesses require a helping hand.
And there’s something to that. Loans with a higher degree of risk would naturally come with higher interest rates. The question is whether such loans are being marketed honestly and fairly, and whether customers are able to make informed decisions about financial obligations.
Online lenders are a growing economic and political force. Big banks worldwide could lose 24% of their revenue over the next few years to fintech firms offering personal and commercial loans, according to a recent study by PricewaterhouseCoopers.
OnDeck, based in New York, has joined with a handful of similar firms, including Kabbage and Breakout Capital, to form the Innovative Lending Platform Assn., a trade group.
The organization said in an April letter to the Senate Banking Committee that its members are “dedicated to advancing best practices and standards that support responsible innovation and access to capital for small businesses.”
What that means in practice is that these lenders want exemptions from existing banking regulations.
“Many of the innovations brought into the market by financial technology companies may be restricted by existing policy and regulatory frameworks that never contemplated an Internet- or mobile-based economy and are failing to keep pace with such innovation,” the association said.
Payday lenders made a similar case in persuading Republican lawmakers that their business shouldn’t be subject to federal oversight. The House last week approved a bill that says federal agencies “may not exercise any rulemaking, enforcement or other authority with respect to payday loans.”
For their part, fintech firms have found a friend in Rep. Patrick McHenry, the Republican vice chair of the House Financial Services Committee. He’s written a bill, the Financial Services Innovation Act, that would establish “alternative compliance” for the regulation of upstart firms such as OnDeck.
Maybe that’s a good thing. Britain has loosened its own banking regulations to encourage growth of fintech firms.
It’s perhaps fair to think that commercial loans require less oversight than consumer loans because commercial borrowers presumably bring a greater degree of financial savvy to the table. But a small business can be just a one-person operation — as is the case with Newman’s company, Accolade Brands.
My worry is that in the rush to embrace new technology, authorities charged with protecting consumers and small businesses end up creating an even riskier marketplace.
I also wonder why, newfangled technology notwithstanding, fintech firms are justified in seeking different rules for what remains at heart an age-old practice — lending money to customers.
I asked Chris Walters, executive director of the Innovative Lending Platform Assn., what specific regulatory exemptions his industry is seeking. He declined to comment beyond the contents of the letter to the banking committee, which offered no specifics.
The Financial Services Innovation Act is similarly unenlightening. It says fintech firms would submit their own alternative compliance plans, with an understanding that the plans would “serve the public interest” and “not present systemic risk to the United States financial system.”
Fairness in lending means clear and straightforward disclosure of terms and conditions. On that score, OnDeck seems to come up short.
For example, the company’s website boasts that term loans of up to $500,000 can be obtained with annual interest rates as low as 5.99%. Newman said that when he contacted OnDeck, he was hoping to get a loan at such a rate. But it didn’t work out that way.
“They were crafty about it,” he recalled. “They said they couldn’t offer me the lower interest rate, but they’d see what they could do for me.”
What he got was a 12-month, $65,000 loan, plus nearly $17,500 in interest and an origination fee of $1,625. That translated to an annual percentage rate of 55%.
In fact, OnDeck told me its average annual interest rate for term loans, excluding fees, is 38%. If that’s the case, I asked why the rate most prominently displayed on their website is 5.99%.
Andrea Gellert, OnDeck’s chief revenue officer, declined to answer that question. She said in a statement only that “our rates are based on the overall risk profile of our customers, and short-term loans of 12 months or less typically carry higher APRs than longer-term loans.”
Bill Manger, associate administrator for the federal Small Business Administration’s Office of Capital Access, advised starting the hunt for capital not with a fintech firm but with the agency’s LINC search tool (that’s LINC as in Leveraging Information and Networks to access Capital).
The system will connect a small business with SBA-approved lenders in their area, usually within 48 hours. That may be not as fast as a fintech outfit but, as Manger observed, loan applicants will still come out ahead.
“I can assure that you will have a much, much more favorable interest rate,” he said.
Depending on the loan, that rate may run from 6% to 10%, which is a heck of a lot more palatable than 55%. That said, the high-interest online loans are easier to qualify for.
Also, the SBA requires that borrowers personally guarantee loans if they own 20% or more of their business. Keep that in mind if there’s a chance you won’t make all your payments — your house or other personal assets may be on the line.
Newman said he recognizes that online small-business lenders like OnDeck provide a valuable service for those who need money in a hurry. “I just think they should have to disclose all the facts,” he said.
I agree. Which is why we should proceed carefully before giving these firms a longer regulatory leash.
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