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In a rapidly growing market outside the purview of the Truth in Lending Act or state usury caps, online lenders' rates and fees can be next to impossible to compare.
August 26 -
So far, Washington has generally smiled on tech-driven lenders such as Lending Club and OnDeck. But many in the fast-growing industry are now bracing for closer scrutiny.
May 15
The rapid spread of high-cost credit to U.S. small-business owners is fueling an angry backlash in the online lending sphere.
The latest salvo comes from MultiFunding, a loan broker based in Ambler, Pa., On Tuesday, the firm published data about the annual percentage rates for loans it has brokered this year, and challenged its competitors to follow suit.
"At some point there will probably be a government agency telling us to do this. So why not start now?" argued Ami Kassar, the firm's chief executive officer, during an interview.
His comments come amid the rise of so-called merchant cash advances, a largely unregulated and expensive form of financing for small businesses. When business owners take out a merchant cash advance, they agree to let the lender take a percentage of their future credit-card sales.
Kassar decried the product, which is often likened to a payday loan, but for small-business borrowers, because it carries high interest rates – sometimes into the triple digits -- and frequently needs to be rolled over. There is no industry-wide data on the size of the market for merchant cash advances, but observers agree that it has grown rapidly in recent years
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In the spring, one of the largest providers of merchant cash advances, CAN Capital, said that it had provided more than $5 billion in working capital since it was founded in 1998. To meet surging demand, the company recently secured a $650 million credit facility backed by big banks including Wells Fargo, JPMorgan Chase, and UBS.
Kassar argued that loan brokers have strong incentives to steer small-business owners into merchant cash advances, even if they would qualify for a more affordable form of credit.
A $50,000 merchant cash advance could yield a $6,000 fee for the broker, whereas term loan of the same size from a marketplace lender like Funding Circle would likely yield a commission of $1,000 to $1,500, and a $50,000 loan backed by the Small Business Administration would bring in only about $500 to $1,000, according to Kassar.
In addition, the merchant cash advance is more likely to be rolled over, he said, which would yield additional fees for the broker.
"Everything is stacked up for me to do the cash advance loan," Kassar said, before adding: "It's also terrible for the business owner."
Those sentiments are shared by executives at online small-business lenders that offer more affordable terms than merchant cash advance providers do. The lenders say they are losing business to customers who are being steered into more expensive options.
Other observers have expressed concern about whether small-business borrowers fully understand the terms of merchant cash advances. Researchers at the Federal Reserve published a
Companies that offer high-cost loans to small businesses argue that APRs offer a distorted view of a short-term loan's affordability. They also contend that most of their customers are satisfied.
MultiFunding, which brokered $30 million in loans during the first nine months of this year, said Tuesday that 62% of those loans carried APRs of 15% or less. Loans with an APR of 25% or higher made up 5% of the firm's business. Another 8% were loans whose structure precludes the calculation of an APR.
The company's press release named specific competitors and challenged them to publish similar data about their APR ranges.
That list of competitors included
Fundera is one of the architects of a self-regulatory document unveiled in August called the
That document calls for lenders and brokers to disclose an APR to borrowers. It also calls for clearly understandable terms and an end to hidden fees. MultiFunding is among its signatories.
