Cities should proactively talk to businesses about their borrowing needs and rights and lead them in the right direction towards trustworthy sources of capital.
By Emily Robbins.
Access to credit can make or break a growing business. Right now though, the incremental recovery from our recent economic recession means funding for businesses from traditional banks and the government is still very limited. This credit situation has caused business owners to turn to unregulated, non-bank lenders for their borrowing needs. However, some of these alternative lenders are using savvy marketing campaigns to lure businesses into taking out loans with unaffordable interest rates and hidden fees. These escalating predatory small business lending practices are cause for concern, and are forcing us to question if this will be our country’s new credit crisis.
The National League of Cities recently took action by signing on as an endorser to theSmall Business Borrowers’ Bill of Rights, a pledge that pushes for fairness and accountability in the private small business loans market. The Bill of Rights calls for transparent pricing and terms, responsible underwriting, and fair collection practices from lenders and prohibits abusive strategies like debt traps, hidden penalties, and irresponsible credit reporting. (Read about how your city or organization can sign on here.)
The Big Ideas for Small Business, a national peer network of economic development staff from cities across the country, hosted a conversation with Gwendy Brown, the Vice President of Research and Policy at Opportunity Fund, one of the creators of the Bill of Rights. Gwendy shared her suggestions for how cities can prevent local business owners from obtaining a predatory loan.
Survey business owners about their credit usage. One of the biggest challenges is understanding the credit climate in your city, and how local businesses are accessing capital. Implementing a survey tool to collect this data would help city officials get a better sense of the market, and if there are predatory actors at play locally.
Talk to business owners about their borrowing needs. Too often, we only hear about a predatory business lending situation after it’s too late to intervene, and the business is already in a financial state of emergency. Cities should proactively talk to businesses about their borrowing needs and lead them in the right direction towards trustworthy sources of capital.
Inform business owners about their borrowing rights. Education campaigns may be the most effective way to address predatory small business lending right now, since the industry is currently unregulated. The Small Business Borrower’s Bill of Rights lays out in clear terms the red flags borrowers should avoid, and reinforces their right to make informed decisions about accessing capital. Cities can add this helpful information to their existing resources and trainings for small business owners.
The City of Chicago is one of the first cities in the nation to take action against local predatory lenders. In January of this year, Mayor Emanuel launched an awareness campaign to educate the business community about predatory merchant cash advance companies and to promote access to credible local lenders, like Accion Chicago and theChicago Microlending Institute. The campaign posted collateral on buses and trains and also shared information in workshops, email correspondence to business owners, and in the Small Business Center, the City’s one-stop-shop for small businesses. The City’s Small Business Opportunity Centers, which were established in 2014 to provide small business owners with guidance on accessing capital, also serve as a key partner in the education campaign.
It’s not too late to get out ahead of this issue in the short term, with awareness campaigns and more proactive discussions with business owners about their borrowing needs. In the long term, however, more regulatory oversight is needed to help eliminate these “bad apple” predatory lending institutions.
Read more about this issue in the resources below, and reach out to us if you’d like more information about how to address predatory small business lending in your community.
- Small Business Borrowers’ Bill of Rights
- Aspen Institute FIELD Webinar (Sept. 2015)
- Accion: What is Predatory Lending?
- Governing: Are Predatory Business Loans the Next Credit Crisis?
- Bloomberg: Lenders Target a New Subprime Market
- Forbes Op-Ed: It’s Time to Rein in Shady Small Business Loan Brokers