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Small Business Borrowers’ Bill of Rights: Why It’s Important

Aug. 6, 2015
Small Business
Small Business Borrowers’ Bill of Rights: Why It’s Important
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You have plenty of options when it comes to small-business loans as more alternative lenders extend credit to businesses considered too risky for banks.

The myriad choices can get confusing, and some borrowers have made bad selections because they misunderstood the loan’s terms, or were misled about them. Moreover, there is little regulation of the online lending industry.

Now a group of lenders, brokers and nonprofits are working to ensure small-business borrowers have a fair and transparent lending experience.

The Responsible Business Lending Coalition, which includes lenders such as Funding Circle, Lending Club and Opportunity Fund, released Thursday the Small Business Borrowers’ Bill of Rights identifying six rights for small-business borrowers.

NerdWallet breaks down what each right could mean for small businesses:

1. The right to transparent pricing and terms

The coalition is calling for lenders to disclose the annual percentage rate of their loan products. That’s significant because the APR reflects the loan’s true cost. In some cases, borrowing costs are broken into separate parts, including interest rate, origination fees and other charges. The coalition also wants lenders to disclose all upfront and scheduled charges so there are no “hidden fees.”

2. The right to non-abusive products

Some small-business borrowers fall into what the coalition calls “debt traps,” in which they end up in “expensive cycles of reborrowing.” It wants to change that by doing away with “abusive” loan products. For example, it wants lenders to agree not to extend new credit to a borrower who’s unable to repay an existing loan unless the borrower’s financial situation has changed.

3. The right to responsible underwriting

Remember the subprime crisis when over-aggressive lending and poor underwriting practices by banks caused many homebuyers to be unable to pay their mortgages? There’s been a concern that something similar could happen with small businesses. That is why the coalition is asking that lenders offer financing to borrowers who they are confident can repay the debt without defaulting or reborrowing.

4. The right to fair treatment from brokers

Some small-business owners find loans with the help of brokers, which have a financial stake in the transaction. The coalition is pushing for a code of conduct for brokers. For example, the group wants brokers to disclose commissions they receive and charges that borrowers would pay upfront in a loan.

5. The right to inclusive credit access

Just like with mortgages or other kinds of loans, the coalition believes no one should be denied a small-business loan based on race, color, religion, national origin, sex, marital status, age, sexual orientation or identity. “You have a right to fair and equal treatment when seeking a loan,” the group says.

6. The right to fair collection practices

You take out a small-business loan and fail to pay it back. It happens. Maybe it’s due to some unforeseen event, or you made some sales bets that didn’t pay off.

In such cases, the coalition wants borrowers to be treated fairly throughout the collections process, such as lenders working with reputable third-party debt collectors.

Why borrower rights matter

Sam Hodges, founder of Funding Circle, says his company got involved in the drafting of the Small Business Borrowers’ Bill of Rights because “we deal with small businesses every single day who are the victims of bad practices.”

These practices are bad for the entire small business loans market, he says. “Lacking standards like these, it’s somehow a race to the bottom,” he tells NerdWallet.

The coalition wants more lenders to endorse the Bill of Rights, Hodges says.

Ethan Senturia, CEO of Dealstruck, which offers term loans and asset-based lines of credit, says he welcomed the initiative.

“Like in any industry, there are bad actors,” he tells NerdWallet. “We want to make sure that the viability of the alternative lending space is not jeopardized by irresponsible practices of I’d consider a minority.”

The Small Business Borrowers’ Bill of Rights also won the endorsement of SmartBiz, an online lender that specializes in SBA-guaranteed loans.

“SmartBiz pledges 100% support to any actions that will clean up the industry and drive transparency for applicants and borrowers,” SmartBiz co-founder and CEO Ryan Gilbert tells NerdWallet. “SmartBiz has always believed in no game playing when it comes to providing business loans for hardworking small-business owners.”

The Small Business Borrowers’ Bill of Rights comes at a time when there have been calls for government regulation of the growing online lending market. Hodges says he thinks increased regulation will eventually happen and “we want to make sure it’s done thoughtfully.”

The coalition hopes the Bill of Rights serves as a framework for potential regulations on the state and federal level, he says.

Although the regulatory process could take time, Hodges says he is hopeful that “even just at this level of self-attestation, it will shape behavior in a meaningful way.”


Find and compare the best small-business loans

To compare small business loans, NerdWallet has come up with a list of the best small-business loans to meet your needs and goals. We gauged lender trustworthiness and user experience, among other factors, and arranged them by categories that include your revenue and how long you’ve been in business, so that you know which loans you qualify for.


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