Loans

SMB Digital Loan Applications Rose 19 Pct. YOY

As More SMBs Turn To Online Lending, They Face Shady Terms And Fees

As banks continue to shy away from providing small business loans, many small and medium-sized business (SMB) owners have turned to online lending companies to fill the gap. SMB digital loan applications increased 19 percent year over year, according to The Wall Street Journal.

However, many of these companies charge high fees or percentages that aren’t explicitly stated and could get the requesters deep in debt or struggling to survive. The lenders offer extremely high rates and intentionally obfuscate the terms of repayment. They act similarly to payday loan companies, which focus on people in dire straits who need money immediately.

“There is a significant number of bad actors who are mostly unregulated,” said Luz Urrutia, CEO of Opportunity Fund, a California nonprofit. “They are really wreaking havoc across America’s small businesses.”

Most of the loans are for amounts less than $100,000, and sometimes are only a few thousand dollars.

Many of the names in the business are well known, like Amazon, PayPal and Square. Lending to SMBs was up 39 percent in 2019.

Many of the lenders don’t advertise fees, but they can range from 9 percent to 98.3 percent. Long-term bank loans generally charge around 7 percent. Other lenders can charge as much as 358 percent.

One business owner, Johnathon Bush of a company called Not Just Cookies, needed money in November 2018.

He borrowed $38,000 from two online lenders, which charged him $56,000 with fees. The lenders started taking out $450 from his bank account daily, which ate into his average sales of $600.

“I was able to eat and sleep, but there was nothing else left,” Bush said. “All the cash was going away fast.”

Bush used what is called a merchant cash advance, in which borrowers pay back in revenue rather than a payment. Allowing access to the borrower’s bank account is a common practice.

“A vast majority of [borrowers] are consumers in every respect,” said Glenn Christensen, associate professor of marketing at Brigham Young University. “Yet the law treats them as sophisticated, multi-million-dollar companies.”

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PYMNTS STUDY: THE CROSS-BORDER MERCHANT FRICTION INDEX – JUNE 2020

The PYMNTS Cross-Border Merchant Friction Index analyzes the key friction points experienced by consumers browsing, shopping and paying for purchases on international eCommerce sites. PYMNTS examined the checkout processes of 266 B2B and B2C eCommerce sites across 12 industries and operating from locations across Europe and the United States to provide a comprehensive overview of their checkout offerings.

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