Given the number of small business owners who take funding from alternative lenders and especially the high number of small business owners who default, something should be done to help small business owners who are taken advantage of by an alternative lending industry which is highly unregulated, at best. In many cases, uneducated so-called "lenders" and brokers who couch themselves as "underwriters" suck the life from small businesses until they are run into the ground and cannot operate their businesses effectively.
Surely, a standard set of rules or Bill of Rights could serve as a guide rail for those who are in the industry which protects small business owners.
In this article, we explore ideas which we believe could be easily adopted by the industry or policymakers as a set of standards or rules for the industry which would certainly clean up what has become a massive mess.
By Thomas Tramaglini, Chief Operations Officer
The Center for MCA Research
There is a lot of room for improvement in alternative lending.
Alternative lenders are not banks. For the most part, they are not publicly traded companies. And, as a whole, the majority of the alternative lending industry is made up of companies who use their own funds (or syndicated funds) to purchase the receivables of small business owners at a discounted rate, for which they receive (massive profits) when they are paid by the small business owners.
These alternative lenders do not give loans and because they do not, they fall outside of most consumer protections which come with borrowing money.
And, for most small business owners there are few options that exist when funding is needed. For most small businesses, bank and low interest loans/lines of credit exist only in fantasy land.
So, alternative lenders do play an important function in funding small business owners.
Yet, we believe that nearly half of all small business owners who take on their funding default on their agreements. The only time we have seen these data discussed in public was when PAR funding was taken down by the United States Department of Justice. We have also seen some similar data provided in the recent case from New York where the NYAG is attempting to go after several MCA companies (Yellowstone, Mr. Advance, Cloudfund, Delta Bridge).
The actual concept is very simple. The outcomes associated with defaulting can be awful for both the MCA company, as well as small business owner.
We also believe that most defaults are very avoidable.
On one end, small business owners should know what they are getting into. However, most do not until it is too late and few know what is happening until they have defaulted and have no way out. Alternatively, alternative lenders also can clean up their actions significantly. As a whole, we know that there are alternative lenders who do their best to do right. But as a whole, there are a TON of bad players in the space.
Remember - the best alternative lenders are hurt by the worst alternative lenders. And the best small business owners are hurt by the worst small business owners.
A novel idea: What if there was an alternative lending Bill of Rights for Small Business Owners?
So, why would a Bill of Rights for alternative lending help both the industry, as well as small business owners?
Because there are a ton of bad practices by both small business owners and alternative lenders which are conducted daily. Some of this is based on sheer incompetence and some bad practices are based in greed.
Our corporation is comprised of employees and attorneys who have worked in alternative lending, as well as in debt remediation. We know both sides of the game and believe that better can be done. To start this conversation we have outlined some ideas, a draft of standards with some basic commentary which would certainly lead to more stability in alternative lending.
Alternative Lending Bill of Rights
Ethical behavior is needed - across the board.
Our team has spent a lot of time in the industry and we know that many players in the space are ethical - But way too many players in the industry are not.
It is time for alternative lenders and brokers to not lie, mislead business owners, and tell the truth, even if it means they do not close deals. While some states like California have made rules such as disclosure statements for cash advances, most brokers and alternative lenders understand how to get around those laws and continue to make money at exorbitant amounts.
Alternative lenders should be transparent in who they are and what they do.
From our experiences, the best alternative lenders are those who are transparent, build positive relationships with their clients, and honest. Those who are dishonest, not transparent, and just conduct a get rich fast scheme tend to hurt those in small businesses the most.
Alternative lenders SHOULD AT A MINIMUM disclose some things, such as:
An overview of their business.
Their time in the industry.
How much they have purchased/number of deals over the past 12 months.
Default rate.
How many UCC liens they have filed in the past year.
In many instances, alternative lenders and their owners have descriptions on social media or LinkedIn which suggest they have funded thousands of small business owners and businesses, manufactured reviews, and more which do not provide any truth. This information is made to mislead small business owners and others who do business with their alternative lenders.
Brokers should follow an ethical code of conduct punishable by law.
Small business funding brokers are all over the place. Like the alternative lenders, some brokers are ethical and great... many are not.
The ones who are not are are skilled in:
misleading small business owners
unethical practices like stacking
altering bank statements
charging extra fees
hurting the alternative lenders with their practices
These brokers are schooled in skilled in funding and sales. But they do not care about the small business owner. They will lie, cheat, change bank statements, stack, and more to make a buck. When the business owner is used up, they move on to the next one and that is the game.
Brokers who ruin small business owners at the expense of others should be held accountable.
There should be a consumer protection organization which small business owners can turn to to report actions which are shady.
Just wanted to put this one out there. We understand that the department of justice may be a hard sell for such an entity, but because there is no oversight or ability for small business owners to report shady dealings, little help is available for small business owners. And, we are not saying that small business owners should be able to get out of paying their obligation, but they should be able to defend themselves against unethical practices which occur each day.
Brokers should be required to understand alternative lending.
Unfortunately, there is no standard of knowledge of education for a broker or alternative lender to work in the industry.
At a minimum, because of the ability of a broker or alternative lender to handle alternative lending transactions there should be a minimum of standard for what brokers and alternative lenders should know and be able to understand.
Most importantly, brokers and alternative lenders need to understand merchant cash advances and loans so they can discuss the commitments and transactions with the client. Too many brokers and alternative lenders sell alternative loans and advances and fail to explain to the client an overview of what they are doing. From working in the industry, most brokers do not even know what a merchant cash advances is, let alone what it does to the business owner.
States should have licensure or educational requirements for those in the industry. We believe that having such a requirement would certainly clean up some of the nonsense which hurts many small business owners.
Underwriting should be made with competent standards, as well as industry accepted principles.
How approvals in the alternative lending industry happen and fund deals is based on a flawed science which is not scientific.
The definition of underwriting is simply that it is a process that determines if someone should be approved for funding.
Given that the alternative lending industry as a whole sees about 1 in 2 small business owners default, we believe that a good part of this is that the underwriting process fails to determine risk in an adequate manner. That is, taking a couple of months of business bank statements and hedging approvals on some arbitrary number of deposits or amount of daily revenue is just bad.
Alternative lenders should adopt standards for approving funding based on way more data points than bank statements.
Agreements should disclose all rules in an understandable way
Most alternative loan and cash advances should have easy to understand agreements so the person or business being funded knows exactly what is coming. Most do not. This is including explaining in a simple manner the Uniform Commercial Code and the implications made if someone defaults on the alternative funding.
What should be simple to understand?
Amount overall
APR or Factor Rate
How much the alternative lender is making
Broker fees and compensation
Frequency
UCC liens
UCC actions
Procedures if having a hard time paying
What happens if you get sued
A, Alternative Lending Bill of Rights would go a long way for both alternative lenders and small business owners.
Without a doubt, both alternative lenders and small business owners would benefit from having a standard set of industry principles or tenets to follow. That is, small business owners would have better performance if they knew the nuances of what they were doing, explained by qualified players, and with good intent of helping business owners. On the other hand, alternative lenders do not want small business owners to default and having such things as mentioned above would for sure help default rates.
We specifically call for such a set of standards which would improve this industry exponentially.
So What?
The team at Beacon Client Solutions regularly works with clients who have been taken advantage of by MCA companies. Specifically, those business owners who have been burned.
Dr. Thomas Tramaglini is the Managing Director and Negotiations Manager for Beacon Client Solutions, a company that supports small businesses on a host of fronts, especially MCA debt. Thomas has been a small business owner for many years, as well as held leadership positions in several organizations and companies. Thomas holds a B.A. in History, as well as Masters and Doctorates in Organizational Leadership from Rutgers, The State University of New Jersey.
Disclaimer: Beacon Client Solutions is not an accountancy, or a law firm. We are business consultants. While Beacon works with outstanding attorneys and accountants, we cannot and do not provide legal or tax advice. All of our work is connected to those who are legally certified to give such advice. Beacon does have a longstanding body of work in MCA resolution and understands what small business owners deal with, specific to MCA. Beacon Client Solutions serves clients in all 50 states, Puerto Rico, Mexico, and Canada.
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