Non-traditional lenders have formed a new coalition to make sure Congress and federal regulators know what their industry is doing to help small businesses get the credit they need.
The Coalition for Responsible Business Finance will represent the growing number of non-traditional lenders and finance companies that use technology to provide credit to small businesses that often can’t get loans from traditional banks. Online lenders originated an estimated $5 billion in loans to small businesses in 2014, according to the Federal Reserve.
The coalition will focus on educating policy makers on the role so-called FinTech lenders play in helping small businesses access credit, and on developing industry best practices, in order to help borrowers from being taken advantage of by unscrupulous lenders.
Notably, the coalition’s advisory board includes representatives from three organizations that represent small businesses: the National Federation of Independent Business, the National Small Business Association and the Small Business & Entrepreneurship Council.
“Our members will benefit from the coalition’s work,” said Todd McCracken, NSBA’s president and CEO.
Plus the coalition will be run by Tom Sullivan, a former chief counsel for the Small Business Administration’s Office of Advocacy.
“I’m excited about this,” Sullivan said.
Policy makers need to know that are “some really good, responsible businesses out there” making loans to small businesses outside of the traditional banking system, he said. The coalition wants to encourage regulators to “take a soft-touch approach” to this new industry, he said.
For example, the Dodd-Frank Act wasn’t supposed to hurt community banks, but the new law’s regulatory burdens make it difficult for them to make loans of less than $100,000 or $150,000, Sullivan said. The coalition wants to make sure Congress and regulators strike a better balance in their approach to non-traditional lending.
“If we don’t strike that balance, everybody loses,” Sullivan said.
Breakout Capital of McLean, Va., is one of the non-traditional lenders that is part of the coalition. It was founded last year by Carl Fairbank, a former investment banker, who said he wanted to provide small businesses with “the most transparent product we possibly can.” The company provides cash advances and invoice factoring, as well as business loans.
Educating small businesses is a priority for Fairbank. For example, Breakout Capital’s website warns businesses against “stacking” — accepting multiple advances to fund daily operations.
“Reckless stacking has become all too prevalent in the alternative finance market, making it nearly impossible for many small businesses to afford the payback amounts accrued from multiple sources,” a company blog states. “This puts small businesses on a cycle of difficult-to-escape high cost repayment terms since stacking increases the overall cost of every funded dollar.”
PayNet Inc., which provides credit data to lenders on 22 million small businesses in the U.S. and Canada, also is on the coalition’s steering committee.
“I think the coalition can help foster greater access to capital for small businesses,’ said William Phelan, PayNet’s founder and president.
“Small businesses are facing really tough access to credit,” Phelan said.
Traditional lending involves long waits and lots of paperwork, and is “really a rationing system,” he said.
This is all based on a misunderstanding — that loans to small businesses are risky, Phelan said.
“Small businesses are less risky than some of the big companies,” he said.
Non-traditional lenders are “fostering new uses of technology that can speed up the access to credit,” he said, and make financing less expensive for small businesses.
“We want to create a great market here,” Phelan said.