Tuesday, September 9, 2014

Interesting Bloomberg article on small business loan 'market makers'

Bloomberg Businessweek reports that new entrepreneurial firms are entering the under-served small business lending market and earning returns up to 50%!.  That's what I've been trying to tell everyone in my book, Invest Local.  

You can make these types of investments yourself and pocket big returns if you open your eyes to the opportunities around you.

The article poses the question, "should small business lenders be regulated?"  It doesn't matter if they should or shouldn't.  Regulation could kill these intermediary 'market makers' but I don't believe they'll never be able to intervene in one-to-one relationships between a local lender and a local small business.  Interesting article....

Expensive Small Business Lenders Are Unregulated. Should They Be?

Former Small Business Administration Administrator Karen Mills
Photograph by Brendan Smialowski/AFP via Getty Images
Former Small Business Administration Administrator Karen Mills
The Main Street credit gap has become such a well-accepted fact that whole waves of startups have launched, often armed with impressive-sounding technology, to improve small business owners’ access to capital. Many of those new firms, including OnDeck, which has loaned small businesses more than $1 billion since 2007, and Kabbage, which loaned more than $200 million last year, are largely unregulated.
Critics calling for regulation of alternative lenders have pointed to high borrowing costs, which often top 50 percent on an annualized basis, and lack of transparency, especially among the brokers many lenders rely on to bring in business. On the other hand, “there are some who say the marketplace is solving the problem,” said Karen Mills, former head of the Small Business Administration, in a recent interview. “You have innovators and entrepreneurs coming in, and you don’t want to get in the way of this too soon.”
Mills wouldn’t take a firm stand on whether the new lenders should be regulated. But she knows Main Street’s borrowing woes well. Her tenure as head of the Small Business Administration began in the dark months following the financial crisis and roughly coincided with a 20 percent decrease in small business loans. This week she published a detailed account (PDF) of the current state of bank lending to small business, hinting at the role the government might play in helping Main Street companies access credit.
Other obstacles are more likely to last: Main Street is made up of diverse businesses, including long-haul truckers, nightclubs, and Etsy retailers, to name a few, making it hard to create uniform underwriting standards. Meanwhile, the pool of community banks—a traditional source of small business financing—has diminished to fewer than 7,000 from more than 14,000 in the 1980s.
As alternative lenders seek to fill that gap, the debate over regulation is likely to heat up. Among the federal agencies that might take a more active role in regulating online small business lending, Mills says the Consumer Financial Protection Bureau is the most likely candidate. That’s because Dodd-Frank charged the CFPB with collecting data on small business loans to “facilitate enforcement of fair lending laws.” As Mills points out, the agency has a full plate writing and implementing rules to govern the consumer credit market.

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