"Unaffordable and Unsustainable" - new Opportunity Fund report highlights predatory pricing and terms alternative lenders charge small businessesPosted on May 24, 2016 by Caitlin McShane
Today, Opportunity Fund releases our latest research report, "Unaffordable and Unsustainable: The New Business Lending on Main Street." The report offers a first-of-its-kind analysis of the loans and cash advances being offered to small businesses by short-term, high-cost alternative lenders.This growing market of alternative lenders operates largely outside of government regulation, with many lenders selling short-term, high-cost financing products that do more harm than good.
Our research draws conclusions from a detailed dataset of alternative loans held by small business owners who came to Opportunity Fund in hopes of refinancing. The report uncovers punishing loan terms from short-term, high-cost lenders, including an average annual percentage rate (APR) of 94 percent and an average monthly loan payment that is nearly double the owners' net incomes.
The short terms and extraordinarily high cost of these loans put many small business owners in a cycle of debt that can be nearly impossible to get out of. Fortunately,not all non-bank small business lenders are doing this, and we applaud the ones that have signed on to the Small Business Borrowers Bill of Rights.
Highlights from the report include:
- The average alternative loan in the dataset carried an APR of 94%, with one loan priced at an astounding 358% APR
- The average monthly loan payment for businesses in the dataset is nearly double (178%) the net income available to their owner(s)
- Among Hispanic borrowers in the sample, the average monthly payment was more than 400% of take-home pay
- More than 25% of these businesses succumbed to multiple alternative lenders, in a practice called "stacking" in which lenders provide a follow-on loan to a small business that already has a loan
- Among the businesses Opportunity Fund helped refinance, owner(s) cut their monthly payments by over 60% and their APR by an average of 85%
High cost, predatory lenders operate in a regulatory void, resulting in a growing number of small-business owners accruing debt they can never repay. This report underscores the need for small business owners, lenders, advocates and policy makers to join together and demand transparent and responsible lending.
Download the report here and join our webinar on June 1st at 11am Pacific to hear more about the results.