The Internet has helped make the world a lot smaller and, in turn, opened up new avenues for small and mid-sized businesses to find the loans they need to grow and thrive after being rejected by conventional lenders.
There tend to be two kinds of lenders in the online space.
Most of them specialize in six to 12-month cash advances (or loans) and charge interest rates of anywhere between 60% and up to 200%. In a sense, these are the payday lenders of the business world.
There also is a much smaller group of lenders who charge a far more reasonable 12-30% that's amortized for up to 60 months. On the back end, many of these loans are sold to investors which can add a bit of uncertainty to the process.
The problem is that both kinds of lenders are being lumped under the moniker of "marketplace lenders." That's troublesome because the lenders clearly serve different purposes.
Even the federal Treasury Department has grouped both kinds of lenders together under the title of marketplace lenders.
Back in July, Treasury asked for public input on the marketplace lending industry related to "(i) the various business models of and products offered by online marketplace lenders to small businesses and consumers; (ii) the potential for online marketplace lending to expand access to credit to historically underserved market segments; and (iii) how the financial regulatory framework should evolve to support the safe growth of this industry."
That grouping continued in October when Treasury Counselor to the Secretary Antonio Weiss discussed six key findings. Many of those findings touched upon how the lending field continues to develop and is in need of strong standards.
So, why, you might ask, is it important that a distinction be made between the cash advancement lenders and those who amortize the loans over much longer periods?
As mentioned above, they serve different purposes.
The cash advance loans are for quick-fix needs-or for businesses that are having trouble lining up a loan elsewhere.
Given the exorbitant interest rates, they're best to be avoided if at all possible. Of course, that isn't always possible and, admittedly, there's a whole world of underserved would-be borrowers out there who will gladly take any help they can get.
"Banks have left a big void in finance when it comes to serving consumers, which marketplace lenders have come in to fill," David Klein wrote in CommonBlog.
The longer amortization loans more closely resemble traditional bank loans and are for more stable businesses with at least some track record and a balance sheet that doesn't make the lender cringe in horror.
Not distinguishing between the two loans ultimately does a disservice to borrowers. That's because most lack the knowledge to realize that there are different kinds of loans available. With the term "marketplace lending" becoming the standard, some worthy businesses may well get stuck with cash advancement loans when they might have qualified for more conventional lending.
One of the goals of loan brokers is to make the lending process as clear and transparent as possible, because educating clients is a key part of the mission. That's why terminology is important and why generic terms as such marketplace lending must be avoided if we truly want to serve small-business clients.