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Unaffordable and Unsustainable: New Business Lending

On the heels of the Great Recession, a new breed of “alternative” lenders has emerged to offer small businesses much-needed access to credit. These new lenders are filling a void created after banks dramatically cut back on their lending to small businesses. While some of these new alternative lenders are responsible companies that use new technologies to lower costs and deliver affordable and fair credit, the majority are peddling short-term and high-cost products that subject borrowers to opaque and often draconian terms, steep repayment obligations, and astonishingly high annual interest rates.

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These alternative lenders operate in a regulatory void. Some avoid state usury laws and other regulations by claiming their debt product is a “cash advance,” rather than a loan. And while there are federal regulations governing consumer loan products like credit cards and mortgages, no such protections exist for commercial loans, even in cases where the business is a sole proprietor who has no greater financial sophistication than the average American. The result of this trend is that a growing number of small-business owners are accruing debt they can never repay, falling into debt traps that bear a striking resemblance to the destructive cycle of payday lending.

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