Many people don’t realize that small business lending lacks a lot of the protections for borrowers that currently exist in consumer lending. The Truth in Lending Act, designed to inform consumers about their use of credit, has been law since 1968. But there has never been an equivalent law for small business credit. There are companies who are looking to change this and Fundera is one of several companies leading the charge. Fundera has already been involved in the Small Business Borrowers’ Bill of Rights as a founding member.
As a marketplace for small business lending options they have now created a new disclosure box that allows small businesses to better compare and understand product offerings. We spoke to Brayden McCarthy, VP of strategy at Fundera to learn about their new disclosure box and how they aim to put the borrower first. The core principles of the new disclosure box are as follows:
- Conspicuous: Information for the loan should be conspicuous. It should be in bold at the top or on the front of the screen when viewing online. Borrowers should not have to dig for pertinent information regarding their loan.
- Clear: Loan documents should be clear, written in plain english to cut through complexities. There should be no hidden information or fine print.
- Comparable: Borrowers should be able to compare products side-by-side, showing the same metrics across products including APRs and total cost of the loan.
- Comprehensive: Information to the borrower should be comprehensive including total repayment, monthly/daily repayments, origination fees and prepayment penalty.
- Contemporary/Interactive: The process should be contemporary and interactive and go beyond the Schumer Box to allow borrowers to make informed financing decisions.
- Correct: Balance principles where needed to avoid oversimplifying or overcomplicating product terms to the point of inaccuracy.
The Fundera team sent us two screenshots so we could get a look at what their disclosure box looks like and see how they have put these principles into action. As you can see below Fundera has made the loan terms extremely clear across different loan types.
Short Term Loan Example
Merchant Cash Advance Example
My Take
I think it is critical that small business lenders embrace an initiative like this. We have heard about the SMART Box initiative from OnDeck, Kabbage and OnDeck but have yet to see how it will be implemented. This simple disclosure box by Fundera certainly makes a good starting point.
In the Treasury report released back in May they specifically mentioned small businesses as an area that needs improved borrower protections. Kudos to Fundera for coming up with something that is comprehensive yet simple to read and understand. I think it is inevitable that something like this eventually becomes part of a new regulation protecting small business owners. It is good for the industry to get ahead of this to try to create a standard that is good for borrowers and small business lenders alike.
- 6Shares
Great to see this kind of push for transparency. Getting a loan is hard enough WITHOUT confusing numbers.
Small business lending is complicated, and I worry a bit about trying to oversimplify the features of a credit product to a borrower. Because of the complexity of these products, and varying use cases, I don’t think any solution that tries to simplify is going to be perfect. That being said, I take the point that we need to balance that consideration with the need to describe the product in a way that every borrower can understand. I think this does a pretty good job. Curious to see how the industry responds.
This is just a sham. If they are so good – why allow loan sharks that HAVE not signed the small business borrower bill or rights on their platform?? Their Median APRs is atleast 40%. Google has disallowed any one >36% APR to display adwords. They are driven by sales volume and the incentives are such that to push the customer to get as much amount as possible without any regards to the underlying rate.
Stop being the nice guy from outside and still a mean payday lender from inside. Look at your examples above that clearly show the APRs of 60%~. How can it be a good deal for the customer and not a debt trap.
isnt this the basically the same thing as the SMART box? why wouldn’t they just support that initiative?
idk maybe because no one knows what smart box even is — they announced a bunch of press around it in feb but there’s been no public talk of what it’s going to look like or what it’s going to include and how it’ll be shown… also have some doubts about lenders being able to do this on their own… don’t think a lot of these guys like to disclose things like APR and monthly repayment… but we’ll see. hard to judge something that hasn’t been released