Tags: small business | subprime | lending | regulation

Colorado State Professor: Subprime Business Loans Are Needed

By    |   Tuesday, 10 Jun 2014 01:23 PM

Worries abound that the boom in subprime business loans, already more than $3 billion a year, will lead to another financial crisis.

If many small business owners become unable to repay the loans, which often carry interest rates higher than 100 percent, the outcome could be catastrophic. But at least one expert argues that a regulatory crackdown would be a big mistake.

"Subprime business loans can indeed be risky. The problem is that alternative loans are a crucial resource for many entrepreneurs — particularly startups," writes Ronnie Phillips, professor emeritus of economics at Colorado State University, in an article for American Banker.

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A regulatory crackdown could impose higher costs on lenders and borrowers and ultimately hurt the overall economy.

Many startups simply have no other financing option. They are unable to qualify for financing from traditional lenders or the Small Business Administration.

Startups receiving subprime loans are more likely to survive and thrive and create jobs and revenue, Phillips notes, citing a study by San Antonio microfinance institution Accion.

Instead of implementing usury laws and other restrictions, we should encourage financial innovation to allow lenders to provide credit at competitive rates, Phillips argues, saying high rates might be due to lack of competition.

A cash advance program from Square Capital offers a good example. Rather than making a loan payment each month, borrowers pay a percentage of its credit card and debit card sales plus a fixed cost.

"Because alternative loans are important for new businesses, financial innovation should be encouraged through regulatory restraint," he writes. "Regulators should take a wait-and-see approach and avoid setting interest rate caps in order to see how profit incentives can improve the market."

Others suggest that tougher regulations are needed. The lenders' tough tactics and high rates are much like those of predatory lenders who targeted consumers in the past, according to the San Francisco Business Times. The Consumer Financial Protection Bureau has issued regulations to reign in those lenders.

"It won't be surprising to see some of those protections eventually expanded to include small business owners," states the San Francisco Business Times.

Subprime business loan lender World Business Lenders LLC in New York offers loans with rates up to 125 percent, reports Bloomberg. If the borrower can't repay, it seizes their assets.

"This is the new predatory lending," Mark Pinsky, president of Opportunity Finance Network, a group of lenders that help the poor, tells Bloomberg. "And the predators, just as they did in the mortgage market, have gotten increasingly aggressive."

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Worries abound that the boom in subprime business loans, already more than $3 billion a year, will lead to another financial crisis.
small business, subprime, lending, regulation
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2014-23-10
Tuesday, 10 Jun 2014 01:23 PM
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