Published in the Union Leader (1/16/2017)
Q: I’m a small business owner looking to expand, and I don’t want to go through the process of selling ownership interests or applying for a loan through a large bank. I recently heard that I might be able to get a loan through a “Fintech” company. Is this true?
A: Yes, but proceed with care. “Fintech,” short for financial technology, comprises companies offering technologically innovative alternatives to traditionally structured financial services. Many Fintech companies do not directly deal with consumers, but simply provide services for larger institutions. Common examples include data mining on potential customers or easing the payment process from consumer-to-business transactions. In that way, most Fintech companies do not compete directly with traditional banks.
However, a growing number of Fintech companies are offering business loans, filling a niche for business owners who find it hard to secure financing in a post-financial crisis market. Benefits can include faster application processes, lower interest rates, and expedited receipt of funds after approval. These benefits are possible because Fintech lenders use the latest technology to deliver more personalized service. For example, one Atlanta-based lender uses a sophisticated algorithm to determine credit worthiness as an alternative to a business’ FICO score.
There are, of course, potential hazards with engaging with Fintech lenders. Because Fintech companies are not considered “banks,” federal law has not caught pace with this emerging technology. Borrowers seeking loans for family or other personal expenses – consumers – are protected by several different federal laws, such as the Truth in Lending Act, which requires lenders to show the total cost in terms of an annual percentage rate (“APR”). Fintech companies have yet to be regulated at the federal level.
Each state’s consumer-protection laws protect individual consumers from predatory lending practices. However, small business owners are not considered consumers and so remain unprotected under these laws. This leaves a great deal of discretion with the lender regarding what information to disclose, including real costs of the loan and features which make the loan more or less desirable to a particular borrower.
As the frequency of transactions and the total dollar amount borrowed nationally by small businesses increases – 2015 saw a 60% increase in loans over 2014, to $1.9 billion – the Fintech industry is still waiting for federal regulations to crop up. It may not have to wait long: on December 2, 2016, the Office of the Comptroller of the Currency, a federal regulator, announced a plan to offer a national charter to Fintech firms. Firms which apply for and receive the charter will likely be regulated similarly to traditional banks. The Securities and Exchange Commission also indicated some level of involvement, although to what extent is not yet clear.
It may turn out that 2017 signals the start of a more regulated and consistent Fintech industry, opening the door to significantly more small business lending. As with any loan, small business owners are encouraged to ask tough questions to determine the loan’s true cost and, if necessary, to consult with an attorney before signing.
Robert can be reached at [email protected].
Know the Law is a bi-weekly column sponsored by McLane Middleton, Professional Association. We invite your questions of business law. Questions and ideas for future columns should be addressed to: McLane Middleton, 900 Elm Street, Manchester, NH 03101 or emailed to [email protected]. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.