Today in Washington, D.C., a coalition of lenders, credit marketplaces, brokers, nonprofits and others (including Fundera and Funding Circle) have introduced the “Small Business Borrowers’ Bill of Rights,” aimed at eliminating predatory lending to small businesses.
You might think that the world of small business loans is highly regulated, but in actuality the more robust state and federal laws out there focus on consumer loans (student loans, credit cards, and home mortgages) without having much application to small business loans.
That said, the Borrowers’ Bill of Rights is just an in-industry step toward enacting best practices among lenders, credit marketplaces and brokers, as opposed to a new law.
Here are the guiding principles of the Small Business Borrowers Bill of Rights:
- The Right to Transparent Pricing and Terms, including a right to see an annualized interest rate and all fees
- The Right to Non-Abusive Products, so that borrowers don’t get trapped in a vicious cycle of expensive re-borrowing
- The Right to Responsible Underwriting, so that borrowers are not placed in loans they are unable to repay
- The Right to Fair Treatment from Brokers, so that borrowers are not steered into the most expensive loans
- The Right to Inclusive Credit Access, without discrimination
- The Right to Fair Collection Practices, to prevent harassment and unfair treatment
“When you make a successful, transparent loan to a business, you can see them grow to a place where they have additional credit needs,” said Sam Hodges, Funding Circle co-founder. “If you keep things in balance, you can grow with your customers and succeed together. But if you’re lacking principles of transparency, and trapping borrowers in a cycle of high-cost, short-term loans, it becomes a race to the bottom.”
If they aren’t abiding by these guiding principles, lenders and brokers look to get the highest interest rates on short-term loans, putting businesses into a cycle of owing lenders instead of using that capital investment to grow. Without much regulation, the entire industry starts to look like “the wild wild West,” said Hodges.
Fundera’s Jared Hecht explained to me that brokers (Fundera is also a broker) will often get incentives from various lenders to push those lenders’ products over any other type of loan or credit, and then up-charge on the interest rates and pocket the difference.
All the while, that broker will never disclose the conflict of interest to the borrower or the original interest rate.
This type of behavior doesn’t lead to healthy small businesses and ultimately darkens the entire SMB lending industry for new entrants, who might rather take a smaller loan from a bank or give up equity to a VC then try to tame the wild west.
But if the Borrowers’ Bill of Rights can build up awareness on the side of borrowers, the hope is that lenders and brokers who are not following best practices will either have to change or fail.
“All good things take time,” said Fundera co-founder and CEO Jared Hecht. “This won’t solve everything over night but it’s a unified step toward accelerating that timeline. We recognize the challenges that lie ahead and have reasonable expectations about the process. This is step one.”
Thus far, signatories include Accion, Fundera, Funding Circle, Lending Club, Opportunity Fund, and Multifunding, with endorsers that include The Aspen Institute and Small Business Majority.
The coalition is encouraging all parties in the industry to sign on to follow these guiding principles.