There is a lot of talk and buzz in the financing industry today about upcoming regulation--there is little talk about solutions and options to make financing more transparent and affordable.
Here is a proposal that I think would be useful: From the time a borrower applies for a business loan, the lender would have to wait at least ten business days before dispersing funds.
I am sure that the hundreds of lenders who offer "next day" or "second-day funding" are shaking their heads at this idea. However, there is logic to my madness.
- If business owners did not have immediate access to capital, they would be forced to plan ahead. Typically, when an entrepreneur needs money, so quickly it is indicative of a bigger problem.
- Rapid underwriting is superficial and leads to APR's as high as 200 % for the business owner. With the "promise" of speed and convenience, business owners don't pay attention to rate. In turn, bad lending decisions are made that hurt business owners over time.
- In today's market--alternative lenders who are trying to offer much better terms and longer amortizations than the majority of the market are struggling to keep up with the promise of speed promised by their competitors. The problem is that is you want to offer a better rate; you need time to do a proper underwriting. Ten-days is a healthy amount of time.
We desperately need a more rational banking system to help fuel access of capital to entrepreneurs. We need to be careful not to stifle innovation, while still maintaining a safe and healthy lending environment. A ten-day rule could bring a healthy balance to a market where the whole focus is speed instead of loans that work in the long run.
Do you think the ten-day rule in a good idea? What are the pros and cons ?