High-Priced Capital Extracts Price From Small Businesses

By Charles H. Green

Philadelphia-area business loan intermediary Ami Kassar offered some insight into the rising popularity – and what he deems dangerous appeal – of ‘alternative lending’ products available to small business owners. While the business media has marveled at this rising sector for their slick technology, efficient application aggregation and light-touch  quick decisions, borrowers are more attracted to their quick delivery of cash to capital-starved entrepreneurs.

Coming on the heels of the financial crisis, when a majority of banks shut down or severely restricted small business lending, dozens of merchant cash advance and online lending companies have arisen to meet the demand that otherwise in many instances is going unmet. And to be sure, these funds are priced at venture capital rates with relative short repayment terms.

“These lenders are not subject to the regulations that guide banks, and many of them are backed by hedge funds that demand high returns,” said Kassar. “In part for those reasons, these lenders have been very adept at finding creative ways to charge high rates.”

Kassar’s firm, MultiFunding, provides loans that meet client needs and at times some of those include high-rate, short term loans when appropriate. And ultimately, maybe that’s what’s really missing here – the judgment of what’s “appropriate” for the borrower.

Lenders are often too anxious to sell whatever financing product they have to to a business owner who often doesn’t know the difference between a gross margin and checkbook balance. Fitting them into a capital solution merely because it’s in the best self-interest of the lender sometimes financially damages real people. When stories about these kinds of incidents get made public, the entire industry’s reputation gets sullied even more.

Read more at NYTimes.