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SMBs’ Online Lending Surge Raises Borrower Protection Concerns

Small businesses continue to flock to online platforms to find much-needed financing, with banks still failing to fill the demand for small to medium-sized business (SMB) loans despite economic growth in the U.S.

But recent reports in the Wall Street Journal Monday (Dec. 30) said a lack of regulation in the online SMB lending arena is raising concerns over sky-high fees and interest rates, sparking a bigger conversation about expanding borrower protections beyond consumers.

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

Citing data from the Federal Reserve, the publication noted nearly one-third of SMBs sought financing online last year, compared to just 19 percent that did so in 2017. Top players in the industry, including PayPal and Amazon, have promoted borrower trust in the online lending business model for SMBs.

But the majority of online SMB lenders do not disclose publicly their fees and interest rates, reports warned. On Deck Capital is a rare exception, with the publicly-traded firm charging between 9 and 98.3 percent for its annual rates in the quarter that ended September.

That compares to government-backed financing from the Small Business Administration, which currently charges interest rates as low as 7 percent, reports said.

Data from Opportunity Fund, which analyzed 150 online SMB loan contracts signed before 2016, found the average rate was 94 percent. The highest seen in the analysis was 358 percent.

Reports also highlighted the regulatory gap of protecting SMB borrowers. According to the Small Business Administration, 24 million of the 30 million SMBs in the U.S. are operated by sole proprietors with no other employees. Yet those individuals are treated as SMBs under borrower protection rules.

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

Recent regulatory initiatives in New York and California have moved to expand borrower protections to SMBs in recent months.

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The How We Shop Report, a PYMNTS collaboration with PayPal, aims to understand how consumers of all ages and incomes are shifting to shopping and paying online in the midst of the COVID-19 pandemic. Our research builds on a series of studies conducted since March, surveying more than 16,000 consumers on how their shopping habits and payments preferences are changing as the crisis continues. This report focuses on our latest survey of 2,163 respondents and examines how their increased appetite for online commerce and digital touchless methods, such as QR codes, contactless cards and digital wallets, is poised to shape the post-pandemic economy.

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