A congressman is concerned that Fintech loans may harm small businesses

Fintech lending has expanded in recent years, disrupting the small business lending market by leveraging artificial intelligence technology and data analytics.

While fintech lenders bring a number of benefits to small businesses, namely enabling them to borrow money quickly and efficiently when traditional borrowing from banks was not the easiest task, they are not without their challenges.

Small businesses should be aware of some of the problems that may arise when borrowing from fintech companies.

A congressman is concerned that Fintech loans may harm small businesses

To shed light on the challenges, Hon. Dean Phillips, member of the House of Representatives, issued a statement fintech and transparency in lending to small businesses.

Phillips expressed concern that fintech lenders could take advantage of small businesses and the self-employed.

Notes how during the Pay Protection Scheme, the Small Business Committee witnessed a technological advancement, also known as fintech, made small dollar PPP loans to small businesses, especially in low-status communities, more efficiently than traditional banks.

The Congressman continues that while fintech loans have helped many entrepreneurs, there is growing concern that industry practices may target and harm small businesses.

Credit terms are not always clear

The terms aren’t always clear to small businesses, says Phillips, as many online lenders provide potential borrowers with little or no up-front information about the loan or product.

“For example, the speed with which fintech lenders invest capital can come at significant costs. For a conventional bank loan, the APR is usually between 4 and 13 percent. In the case of Fintechs, the APRC for online loans and other financial products can start at 7 and climb above 100%, ”he warns.

Predatory practices

The Congressman also warns of predatory practices that some fintech lenders may use, which put small businesses at risk. It relates to how cash advances for traders enable lenders to receive a fixed percentage of future sales until the financing is paid off.

“The unusually high interest rates and day-to-day repayments associated with MCA can cause companies to fall into an uncontrolled spiral of debt,” says Phillips.

A member of the House of Representatives also notes how many MCA lenders require borrowers to sign an obscure legal instrument in order to obtain money. “By signing, borrowers waive their rights over any legal disputes that may arise,” he says.

Confession of the sentence

The legal instrument is known as the confession of a judgment to obtain money. According to Dean Phillips, when a court forces an admission of guilt, it locks the small business into “this unsustainable debt cycle and eventually forces it to close.”

According to Phillips, the lack of transparency in fintech underwriting is another problem for small business supporters. The data and algorithms that control the automatic underwriting may retrieve unrelated information such as the people the applicant follows on social media or the number of criminal records in the applicant’s zip code.

“Such insurance practices lack transparency and may wrongly deny credit to protected groups or make these products more expensive,” says Phillips.

Dean Phillips concludes the statement by urging Congress to keep pace and make sure that industry practices do not take unfair advantage of entrepreneurs as the fintech sector grows.

It is important that small businesses looking to borrow money be mindful of the exploitative practices of some fintech lenders and do sufficient research and legal advice before committing to borrowing.

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Image: Depositphotos

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