Small business lending A market where ‘predators’ lurk

There is a startling statistic on the website of New York-based Equivico: 69 percent of small businesses do not receive the funding they seek, writes Andy Thomson. It’s this huge funding gap that the firm aims to play a part in addressing.

Eleni Delimpaltadaki Janis, the firm’s managing partner and chief investment officer, has further eye-opening numbers up her sleeve. She believes there is $87 billion of untapped demand for smaller loans of around $200,000 to $500,000. But here’s the injustice: these financially unsupported firms create around one in three jobs in the US economy.

“The genesis of the company was to transform lending to underserved populations in the US and unlock a major opportunity for investors to grow fair financing for small businesses: whether they are underserved because of geography, dearth of quality credit offerings of the type they need, technology deficits in underwriting models, or because they’re owned by women or people of colour who we know have faced systemic barriers in terms of access to capital due to well-documented discrimination,” says Janis.

Much of the problem rests with the banks’ retreat from the small business market. Janis reckons they have been withdrawing for the past 20 years, accelerating since the global financial crisis. She believes it is virtually impossible for profitable businesses with revenues of up to $4 million a year to get a loan from a bank for working capital. Community banks address some of the gap but are not big enough to make a substantial difference.

She also thinks the progressive withdrawal of large banks from small commercial loans has increased what she describes as “predatory” lenders, who can often take advantage of loose regulation of their activities to charge as high as 400 percent interest rates disguised in confusing jargon and hidden fees.

‘Wild West’

Janis describes it as lending’s “Wild West”, adding: “It’s a very inefficient market with a lot of bad products stripping both borrowers and ethical investors of an opportunity for real growth. We’re trying to scale fair, small business lending and bring quality capital and know-how to the space.”

Equivico does not provide small business loans directly, instead partnering with lenders who it believes “have fair and rigorous underwriting processes, inclusive practices and can show strong performance”. It shares its experience in the small business world with these lenders – Janis herself was a vice-president at the New York City Economic Development Corporation, where she established the first ESG investing team and administered a portfolio of 18 tech start-up incubators.

Many small companies resort to predatory lenders out of desperation, says Janis. They assume a bank loan is not an option. The most promising choice for some is a loan from the US State Business Administration – a government agency – but these can take up to 70 days to be available to the borrower. That is too long if the financing need is urgent. So, some conclude a bad loan is better than no loan at all.

Dangers hidden in the fine print

While some companies willingly take out extortionate loans in the belief that they have no option, Janis says others are unaware of what they are getting into

“The terms of these [predatory] credit products, whether term loans or merchant cash advance, can be very difficult to understand,” she says. “The fees are often hidden in the fine print along with repayment and other terms that make it nearly impossible to understand what you are getting, or for that matter, pay back.”

Janis says there have been cases of borrowers losing personal property because they did not realise what the loans were collateralised against. She cites merchant cash advance loans as among the worst examples – some providers of which have been the subject of class action court cases, facing the charge of not being sufficiently transparent.