Presented by Spencer Cowan at the Illinois Senate Hearing on small business and and impact of predatory lending.
small business loans
Early next year, J.P. Morgan will start using online lender On Deck Capital Inc. to help make loans to some of the bank’s roughly four million small-business customers. On Deck Capital, which has extended as much credit in its eight-year history as J.P. Morgan does in a few months, will help the bank process applications more inexpensively and quickly, in hours instead of weeks.
In part because large banks are not meeting the credit needs that neighborhood businesses have for small loans, a new breed of lenders has emerged, operating online, in a space that is virtually unregulated, with some engaging in the same kinds of predatory practices that characterized the small dollar consumer lending space a few years ago. They provide fast access to capital, but frequently the loans have very high interest rates, hidden fees, and allow the lender to take money directly from the businesses bank account, sometimes on a daily basis. As a result, business owners
Online lending has grown incredibly fast and is turning into a multi-billion dollar market. According to a 2014 report by the Harvard Business School, the outstanding portfolio balance of online lenders has been doubling every year. Online loans have become increasingly popular with small business owners who are frequently unable to obtain loans from traditional financial institutions.
An August report, “Dis-Credited: Disparate Access to Credit for Businesses in the Chicago Six County Region,” by the Woodstock Institute, a nonprofit policy organization, has found that banks were statistically less likely to lend to businesses located in low-income and majority minority Census tracts between 2008 and 2012.
Mr. and Ms. Williams are grass-roots entrepreneurs in every sense of the word. And yet their landscaping business managed to flourish in a climate that, for many aspiring small businesses seeking critical loans, sometimes seems more like a desert.
Many nascent entrepreneurs need loans that are too small for major financial institutions to provide, a problem exacerbated by the lending standards that emerged after the Great Recession.
On average, about two of every seven businesses in low-income, majority minority areas received small business loans—including business credit cards, lines of credit, and traditional loans of under $1 million—from large financial institutions with assets of more than $1 billion, according to the report, “Dis-Credited: Disparate Access to Credit for Businesses in the Chicago Six County Region.”
As a lending team manager for micro-lender Accion Chicago, I’ve met the people behind the statistics in the study: hard-working, entrepreneurial people who have the potential to generate jobs for their neighborhood, but struggle to find access to credit in a marketplace that favors bigger borrowers with fancier addresses.