The Business Case For Protecting SME Borrowers


When the Small Business Borrowers’ Bill of Rights was developed in 2015, it appeared as if alternative SME lenders were collectively taking a stance against predatory lending practices in an effort to protect small businesses. While this is indeed true, Gina Harman, CEO of small business lender the Accion U.S. Network — which not only signed the Bill of Rights but helped design it — told PYMNTS that it’s imperative for the lenders to educate small businesses.

“It’s not just a moral obligation,” she said. “It’s a business obligation in providing a business owner what she needs to know.”

For one, Harman explained, SMEs that have a positive experience with an alternative lender will tell the others in the business community. But ensuring that a small business is knowledgeable about different loan products and how they might impact a business could also be the difference between that small business succeeding — and maybe coming back for more capital later on — and ultimately faltering or defaulting on a loan.

That focus on SME financial education is also what drove Accion’s newest banking partnership with Fifth Third Bank, announced earlier this month. Together, the entities will not only facilitate small business and startup access to finance, but also enable access to educational resources, which is a critical component to a successful small business. According to Harman, that’s because small business financial knowledge is often in short supply.

“[Small business owners] are probably lacking in financial knowledge in the ways maybe you and I are,” she said. “The difference between personal finance and business finance can sometimes be pretty vague.”

Small businesses traditionally migrate to three options when they need capital, the executive said: personal funds, friends and family, or a credit card. Indeed, a recent report by Bank of America found that more than a third of SMEs said friend and family provide the most help in running their businesses.

While support from surrounding communities may be encouraging to a small business owner, it doesn’t always make the most financial sense. But when a small business owner enters into a loan agreement blindly, the company can run into trouble.

Harman offered an example of when an entrepreneur seeks out financing to support investment in machinery of some kind. Often, SMEs pursue short-term financing offered by a lender, but while a business owner may have to pay back a loan in six months, it may take years for the financial benefit of that equipment to actually be realized.

“You’re paying back the loan before you can benefit from the purchase you made to grow your business,” Harman said, adding that there are frequently these types of mismatches between the structure and terms of a loan and what a small business actually needs. There are other scenarios, too, like business emergencies that entrepreneurs need to account for when they seek financing. It’s not just about getting the money, explained Harman — it’s access to financing with terms that will support particular needs and situations of a business borrower.

She added that Accion is currently in the midst of research about SME finance and how they access loans and found another disconnect in the small business community.

“Business owners have gone into business to take control of their financial lives,” she said. “Yet, if they have one emergency in the business, they would not have the resources they need to respond to it.”

So while entrepreneurs become such to take control, it appears quite easy for financial control to be lost.

With that in mind, Harman noted that it is extremely important for small businesses to have a vast array of educational resources, from what to do in an emergency and how to plan for it to how to negotiate building leases when choosing their storefronts. Then, she added, there are a slew of regulatory issues unique to small businesses depending on location and industry — for instance, regulations on food and beverage labels or production processes.

All of this weighs heavily on the shoulders of entrepreneurs when access to capital can still be a struggle, said Harman.

“We’re in a time where we still see access to capital as a real hurdle for small businesses,” she said. “Bank lending has still not recovered from 2008. Loan sizes have gone up.”

As traditional FIs like Fifth Third struggle to meet the low-value (but critical) financing needs of small businesses, Harman said collaborations with alternative players can be an effective way to facilitate lending and ensure small businesses stay vigilant. Again, for traditional banks, this comes down to not only what’s right for the small business community, but also what makes good business sense for the bank.

“It makes good business sense for banks to facilitate [small business] growth,” Harman said. “Business owners need a lot of different financial products to be successful, and good banks are looking for a way to be a part of that ecosystem.”