You’re Pre-Qualified for a 13% Loan! (That Really Costs 170%)

Speaker B No, I, I'd probably say— tell you that the people who work around me would probably say that Our credit appetite isn't as big as maybe some others, especially in the non-bank world. If 12 o'clock is perfect, we like to say we're 11 o'clock, maybe slightly more conservative. But I think the answer for us is that we're using a digital platform that can reduce the friction as it relates to the approval or the application and approval process. And so speed is kind of important here for us. Lending money is hard, and so we like to make sure that it's Saying yes to everybody is not our idea of client service, let's put it that way.

Speaker A One thing owners have traditionally been told to do is to try to develop a real relationship with their banker, especially if they're interested in borrowing money. Is that something that you do despite not having branches? Is there still a possibility to develop a personal relationship?

Speaker B Well, you know, it's the definition of relationship, right? First and foremost, I tell you that, you know, we have a relationship with you as soon as we open an account and, and we get to know you. Maybe not, you know, with a direct human touch, but we get to know who you are. We understand who you are. We understand how you transact, and we understand the quality of your business from all the data that we would have. So that's, that's great. And, and so you could use chat to talk to a customer service rep, or you could use just, I want to talk to somebody. You know, that, that's one of your choices. Now, after you would open a new checking account with us and you'll get a reach out from us that says, would you like to talk to somebody? And, and, and if you would, we're here to talk with you. You don't have to, but, but if, if you would, we're here to talk to you, help explain maybe the accounts to you a little bit better, help you get over some questions you might have. But that's your choice. So, so, so we offer you the choice. And I think today the last piece of data I got is about 15%. Of the new clients who open accounts do ask for a conversation with somebody, and, and we have it with them. Then I would say we do have some kind of specialties that are dedicated towards startups, right? So, so because of the technology nature that we're involved in and work with fintechs, we know we're pretty close to the startup community, and, and we have dedicated more human capital to talk to these startups. That might be going through fundraising activities there where we can connect them even to other parts of our organization that work with venture capital firms. And we also, if you went to our website, have a marketplace in which we offer kind of non-banking products and services at some level of discount or priority into the client base in which they can also get some solutions to their problems. So So that all in is, is I think today's relationship versus, you know, walking down to the corner and talking to Frank. People change. And so, so we've tried to put that relationship in the form of a digital solution package.

Speaker A And now on to the episode. Welcome, Jay, Ami, and Luis. I'd like to begin our conversation about alternative lending and small businesses with one owner's story. It's a story you brought to my attention, Louis, and I think it makes a bunch of really important points about this issue. Can you tell us about Paloma Corona?

Speaker C Sure, Loren, it's great to be here. Paloma owns Little Sprouts Language Immersion Preschool in LA, and she got in touch with us through one of the board members of Responsible Business Lending Coalition, Small Business Majority. to talk about how she had been ripped off by merchant cash advance. It almost destroyed her business. And this one really burned me up because I also personally grew up in a family childcare business that my grandmother started and my mom and whole family worked in. I worked in it. I was a preschool teacher. And what Paloma shared is that her business was going well. She was ready to expand into a second location, And she took out what she thought was a 13% loan from Big Think Capital because it came from Big Think Capital and because the contract said 13% on it. And the payments, which were daily, they were coming in and they were so much bigger than she anticipated. And they pretty soon were draining not only the profitability out of the business, but just her own life savings to keep up. And she said, what is going on? What's happening with this? And she, you know, we, I eventually got to look at the contract and saw that not only was it not a loan, it was a merchant cash advance from a different company, Elevate.

Speaker A Explain the difference, Lewis, between a loan and a merchant cash advance.

Speaker C Sure. So merchant cash advances are an emerging kind of financing which likes to distinguish themselves from being loans. by making an argument that they're not a loan, they're a purchase of money that you're going to make in the future. The difference doesn't matter that much to the small business taking a loan, but when they are able to say they're not a loan, that means they don't have to follow laws that apply to loans. Merchant cash advances also are typically repaid not with a fixed amount, but as a percentage of your future earnings. Although in many cases, they end up charging a fixed amount anyway, as they did for Paloma, she got charged $117 a day, and they typically are expensive and short-term. I'll just really point out that the perspective of the Responsible Business Lending Coalition is not that merchant cash advances or any one type of product is good or bad, but that the practices that a financing product comes with need to be responsible, whatever kind of product they are. And that's what our Small Business Borrowers Bill of Rights is about that. Ami was one of the co-authors of, and I'm sure he'll weigh in on soon. But it's the case that in the merchant cash advance industry, bad practices are more common than not. And that's what happened with Paloma. In this case, one of the bad practices that's very common is misleading and untransparent disclosures. So in this case, this company, they didn't even really say clearly that what kind of financing she was getting or what it cost. It looked like it was 13%. When I looked at the contract and computed the effective APR, it was 170% APR, and that might have helped explain why it was so much more expensive than other options Paloma could have taken.

Speaker A Did her business survive?

Speaker C Fortunately, it did. She had a strong business, and she got in touch with another one of the signatories of the Small Business Borrowers Bill of Rights, TMC Community Capital, which is a nonprofit that lends to small businesses. And TMC was able to refinance her, and she's thriving today. And she's telling her story actually and advocating for a law that we're working to pass in California where she's based that would help protect other small business owners from getting unnecessarily ripped off.

Speaker D Let me just say something. You keep saying ripped off. I don't really think this is ripped off. I think it's deceptive. I mean, they didn't steal from her, but it's deceptive. They made it sound like one thing, and they've gotten very, very good at packaging it so that it looks like what it's not. So I'm—I think what they do is deceptive. And the part that's so frustrating is you go to many of these sites and you go to the reviews. People say things like, "Oh, they're so nice! Oh, they were so responsive! I got my money right away." And none of the people could figure out what the interest rates were. And if they knew what the interest rates were, they'd have very different reviews. But that's how they get away with it, because people can't figure it out. It's extremely complicated.

Speaker C Jay, that's how I met you. As our coalition works to pass truth-in-lending laws around the country, you know, if you get a consumer loan, if you get a mortgage, a car loan, a credit card, by law, the lender has to tell you what rate they're going to charge or what the, what the effective rate is. But if you're borrowing for your business, those laws don't protect you. So many of the consumer protection laws that we all kind of count on don't apply when you're working as a small business owner. So we work on passing these, among other things, these truth in lending laws to help create transparency in the market. And I read an article, Jay, that you were quoted in. I think this was in Forbes where you explained really clearly how to compute the effective APR on something like a merchant cash advance. And I thought, wow, this guy really gets it. And I cold-called you.

Speaker A I want to stick with Paloma's story for, for just a moment. The couple things really stuck out to me. One was, uh, and Ami, I want to get your reaction to this, I found it really noteworthy that her business was not in distress. I think there's a common assumption that only a business that was really desperate would take on one of these loans. And here's an example of something quite different from that. How common is that in your experience, Ami?

Speaker E I mean, I joke about it, but I say that when you need financing for your business or you think you need it, you got to slow down. And I say that if you go to McDonald's for lunch because you're in a hurry, you could have indigestion for a few hours. But if you make a financing decision in a hurry, you could have indigestion for a few years or ruin your business or go bankrupt. And so part of the challenge is that, again, I don't know the specifics about Palova's situation, but the disparity between how easy it is to get one of these advances or these loans, and especially how easy platforms like QuickBooks have made it to get 'em versus a couple weeks to get a proper, well-thought-out financing package is For an emotional business owner who's busy and stressed is crazy, right? And I can understand how people easily get deceived at these things. And the assumption that people who get them are desperate or dumb is just not fair.

Speaker C And to be fair, someone was paid to deceive her. I mean, Ami, you guys know Ami is a loan broker. The company that placed her in this merchant cash advance was also a loan broker. She thought it was the lender. She went to their website. Often on these websites, you can't really tell whether the financing company is a lender or broker, but merchant cash advance companies will pay a broker a 15% commission to steer that small business to them so that they can recoup that 15% and more by charging what they charge below, 170%. Meanwhile, you know, If you go to Ami, Ami could send a small business to an MCA and earn 15%, but he doesn't. He helps people get SBA loans, and Ami can tell you what the referral he gets. And I think he does that. I mean, my understanding is it's maybe 1, 2, 3%. And so there's a break in the market because there's a misaligned incentive. There's a conflict of interest where not only brokers, but other what in the industry you call customer acquisition channels and have misaligned incentives to steer their customers, small businesses seeking financing towards not the financing that is best for them, but the financing that is going to pay the broker the highest rate. And so there's really a conflict of interest driving good businesses into bad financing the same way as in the lead up to the subprime mortgage crisis, All these folks ended up in unnecessarily expensive and predatory mortgages, not because a mortgage from Countrywide was the best option that a given family could get or the only option, but often because that was the worst option they could get that would charge 'em the most money. And because it would charge 'em the most money, it had the biggest margin to pay the brokers the highest fee to get to that borrower before better options would.

Speaker D Which explains why I get 5, 10 emails a week saying, oh, borrow money at, you know, 6.9%. And they're all brokers trying to suck you in. I've got 'em in front of me. One says, you've been preselected to apply for a line of credit, they call it. And the other one says, you're prequalified for funding up to half a million dollars. And those are the words they use. And if you don't know any better, it seems legitimate and people get sucked into this stuff. And the reason why they're not desperate, quote unquote, They don't realize what they're getting into. It seems like a good— oh, you can borrow money for 7%, 8%, even 12%. Okay, if you can do something with it. They don't, they don't understand they're getting into a 70% to 300% loan.

Speaker A Do any of you think most business owners should be able to tell the difference between a loan with a 13% rate and a loan with a 170% rate?

Speaker D I have an accounting degree. I Learned it in accounting. I don't know where the typical entrepreneur would've, would've learned how to figure out what interest rates are. I, if they asked their accountant, I would like to think they'd be able to tell 'em what their interest, but they don't even ask their accountant. They think it's a good deal.

Speaker E But guys, let's, let's go back to reality a little bit. Okay? The, the reality is that for 99 out of 100 entrepreneurs' journey, they will hit some points along their journey, no matter how well they plan and how organized they are, that part of my friends, the shit's about to hit the fan and they're stressing payroll or a major payable due next week. I had a couple dozen of them. Jay, you probably had your plenty share of them also, right?

Speaker D Thanks for reminding me. Yeah.

Speaker E Yeah. It's like post-traumatic stress disorder. And when you're at that emotional sense point, especially when your ego is fragile and your pride is online and you're like, holy shit, what am I going to do? And you go online and suddenly you are immersed with very appealing offers that say to you, I can get you money in 2 to 3 days at what looks like a reasonable rate. And you're like, thank God I don't have to call Uncle Henry and, and ask him for money, or I don't have to miss my payroll next week. I'm just going to do this and get done. And usually the first one isn't all that awful. What happens is, as you get one and then you get caught on the debt trap, the treadmill of them, they get worse and worse. In my mind, in terms of impact on borrowers, I see the merchant cash advances or the short-term online loans, or even these online lines of credit as all kind of in the same family. Maybe every once in a while the merchant cash advance might even give the borrower a bit more flexibility. They're all bad, right? And they all are designed to kind of trick the borrower into understanding what they're going to pay for. And what people have to understand is, let's say you get one and it amortizes over 6 months, The computers and the algorithms and the lending systems all know that in about 2 months and 22 days or whatever, you're going to start feeling cash flow pressure again, and they're going to start blasting you with refi options or second options, and then again and again. At some point, they'll start selling your lists. At some point, before you know it, you're working for the lenders. You're not working for yourself.

Speaker D And I mean, I can tell you, it's— you use an example that they went online looking for the money. I'm telling you as an entrepreneur, it's worse than that. They come to me, I get them in the mail every week, I get them on my email every day. You don't even have to go looking for them, they're looking for you. Do I think they're always bad? No. If you need 10 grand really bad to finish some job or something, theoretically, if you had to pay a big interest rate but you could pay it back in a month or two, okay. It's— my whole thing is just tell the customer what they're paying for the interest, that's all.

Speaker C Hey, to your question about that, or maybe Lauren, you asked this, should we expect a small business owner to be able to tell the difference and know what the interest rate is? I do think it is important for small business owners to over time have the financial skills to run the business. That's an important part of businesses being successful. But also in this case, you have to consider that the business owner is going up against the marketing department of the financing company that is in some cases intentionally choosing how they portray the pricing in order to be confusing. So when I met Ami, I was working for a fintech company and we worked together in small business financing. And I can tell you from the inside, the lending industry, not just my company, but any company, they have a marketing department and they're going to do A/B testing to determine what way that they characterize the price of their product leads the most people to take the product. And so it's become very common. My company didn't do this, but others do, to portray the financing in ways that get people to think that it's a better deal than it is. And the Federal Reserve has actually published 5 different studies about how small business financing is disclosed and found that it is often affirmatively misleading in the pricing, especially in the industries that Ami was describing. And Ami, you're absolutely right that this isn't something that's just about a merchant cash advance. It also can be loans, it can be lines of credit. Some examples of what the Fed found is that you might see financing that is marketed as this has a, you know, a 1.5 factor or a 10% factor rate or a 9% simple interest, for a 6% fee rate. And what the Fed pointed out is a reasonable person would think, you know, 9% simple interest means a 9% interest rate, but that deal, when the Fed looked at it, that represented a 45% APR. And so did the 6% fee rate, and so did the 10% factor rate. But people thought that meant a 6% rate or a 12% rate. And part of that is business owners need to know But part of that is business owners need to know that they're up against marketing teams from financing companies that are actively trying to get them to take that deal.

Speaker D And it gets worse. They have, I'm looking at one in front of me. They've got comments from people that have borrowed money. I was able to keep my business growth on schedule. We expanded by 30%. And it's got the name of the company signed off. It's got 5-star from Trustpilot. They use these, these quotes from these people that are legitimate because these people do not understand the interest rate they were paying. So everything else we buy, you can go to the Google review, oh, they got 5 stars, that must be safe. It doesn't work here. It's the only time I've ever seen something that a place can get 5-star Google reviews and be doing horrible stuff.

Speaker A Louis, I wanna follow up on what you said about the fintech that you were involved with. I believe it was called Lending Club and that you helped start it. And I believe, uh, that the goal was to offer, uh, low-cost loans. What happened with that business? How did that work out?

Speaker C Just to correct the record a little bit, please, um, I did not help start the company. The company had started, but I joined to help them start their expansion into small business lending, where previously it had been focused on consumer lending. And, um, like you say, Lauren, a strong company. We raised literally $1 billion in equity at our IPO. It was one of the largest internet IPOs in history at that point, although there's been bigger ones since then. This was 2015. And so we had tons of great engineers in San Francisco, and part of the strategy that we set out, like you say, was to be the lowest-cost financing that a given business could get online, basically to be faster and easier than a bank, but much lower cost and more transparent than the kinds of problematic financing that we're discussing today. And so we might say at that time, I'm not with that company anymore, obviously, we would say, congratulations Lauren, you're pre-approved. We can lend to you at a 20% APR. And I would be sitting in our open floor plan San Francisco office, and I could hear the conversations of all the different loan officer type folks, and they would be having the same conversation many times a day. And they would say, Lauren, we could, congratulations, we can pre-approve you at 20%. And the small business owner would say, well, such and such company is offering me 6%. And that's exactly the kind of stuff Jay is seeing. And then our loan officer would say, well, when they say 6%, what is that? Is that an APR? Is that an interest rate? Is that a just, is it a fee? Can I help you make an apples-to-apples comparison? And we would lose those deals a lot because at that point, the business owner, they knew that someone is trying to pull one over on them, but they didn't know which one's being honest. It's like that scene in Labyrinth with the doors and one of them's lying and one of them's not. You don't know which one to trust if you're not in a state where our coalition working with people like Jay and Ami and others and you, Lauren, has gotten a transparency standard, a truth in lending law passed. But basically what we've seen is that just like in the subprime mortgage market in the lead up to 2008, more expensive, more punitive, worse products are crowding out better products from the market because they can outcompete them by being less honest and by just charging higher prices and hiding those prices.

Speaker D Keep in mind, while they're talking to your person in the office, they can pull right up on their computer screen the place that gave them the lower rate, and they see a 5-star Google review. Oh, they're okay. The guy that's on the phone's lying to me. They got a 5-star. It's unbelievable. They have no reason not to trust these people.

Speaker E Maybe one of the most upsetting things in all of this is that Intuit, which is supposed to have a brand which is an advocate for small business and all this, and the trusted source of your accounting, Last quarter they did $1.7 billion with these loans. In the last 3 quarters, they did $4.3 billion of these things. And they market you based on when they think you are going to need it or in good shape for it. And they make it so easy and so simple, and the rates are astronomically—

Speaker A Wait, do they market to People whose books they're keeping so they know exactly.

Speaker E Absolutely. Exactly. I made payroll yesterday. My cash went down. I got an offer from QuickBooks today for financing. The APR is probably 50 or 60%. And so the fact that these things happen all the time, even embedded. So let's say QuickBooks is earning on $1.7 billion. I'm going to say their average commission on these is 10%. QuickBooks last is making like roughly $60 million a month on commissions from putting business owners in crappy loans.

Speaker C I had been understanding that QuickBooks, that Intuit discloses APRs on the financing, which is—

Speaker E But it's still outrageous. Yes, they They do disclose it. Let's say in my case, I could go get a line of credit from a bank at 8, 9%. The reality is people don't read and that business owners, when you're in a rush and we're all busy and we have 100 things going on all the time and there's a certain implied trust right into it, right? My accounting software is doing this. It has to be good.

Speaker C To your point, Ami, I wonder if we should Talk a little bit about embedded finance and that trend and how that's changing the financing options that small business owners are seeing and what they should kind of watch out for.

Speaker E It's all there, Louis, but the bigger issue I think is how do we ultimately educate small business owners and entrepreneurs to slow the hell down, to make sure you have books and financials that are in order, and to get a line of credit from the bank as soon as you can, right? So I tell the story, if you own a pizza shop on the New Jersey shore, okay? And let's face it, most pizza shop owners are stuffing all their cash under their mattress and they certainly don't have a line of credit from their bank. And then it's Friday and it's the heat of summer and Their air conditioning blows, and they need fifty grand to replace their unit by Monday, or they're cooked. Highly unlikely get a call like this, but they call somebody say fifty grand by Monday, and that person says no problem. Da da da da da da. And the effective APR is probably two hundred percent if you need fifty grand by Monday, and probably they're going to do it.

Speaker D You know, from my experience, the heating air conditioning company would have some relationship with a leasing company and actually get them a decent deal.

Speaker E I share the story not for the specifics of it. I share it for the concept that there are going to be emergencies that happen all along your journey.

Speaker C I have a, a complementary point that, to, to your point of how important it is for, for folks to slow down and look around at their options, a couple things that business owners can watch out for. Jay, I think in your earlier examples, you talked about how some of this stuff coming to your mailbox talks about Funding or capital. If a company is marketing and they're describing their financing to you without saying it's a loan, if they're calling it funding, if they're calling it capital, that probably means that the financing is structured in a way to avoid lending law. And if they're structuring their financing to avoid lending law, they're probably doing other shady things too. And so that's a red flag. Another thing to watch out for, the, the same way Ami was talking about, Watch out for financing offers that are baked into software you've got. If you're that pizza shop and you're doing your deliveries through DoorDash, DoorDash has one financing option that's built into DoorDash and it says DoorDash Capital, click here to get it. How did DoorDash choose that financing? Did they choose it because that was the cheapest financing they thought they could get you or because they wanted one catch-all that would be very profitable for DoorDash and would charge so much money that they can say yes to everyone. That's what it is. So DoorDash has one type of financing they're selling you inside DoorDash. It's probably not the best deal you can get. If you're a yoga studio, if you're a gym and you're on Mindbody, there's one kind of financing in Mindbody and they make it really easy. They see your Mindbody data, click here to take that. That's probably not the best deal you can get. The best deal you can get is doing what Ami's describing, Being prepared in advance, having that kind of financing, and then looking around at the whole market. It'd be great if you can get a bank line of credit. If you can't, maybe there's other good options, but the people that are getting in front of you are getting in front of you because they're paying to get in front of you. And in order to pay to get in front of you, they've got to charge you more money than you should have to pay.

Speaker A I want to pick up on something that Louis and Ami were talking about a moment ago, which is the role of the APR. During these conversations, it sometimes focuses so much on the lack of a disclosed APR that you get the impression that that would be enough. If, if you could just force these companies to disclose their APR, this whole problem would go away. But it seemed as though, Louis and Ami, you have different views of that. Either of you tell me, is disclosing the APR enough? Should that be the goal here to rectify this whole situation?

Speaker C To avoid the straw man, I will preemptively agree with Ami that it's not enough. We think it's necessary but not sufficient. Disclosure's really important, and there's other things that are also important, but it's hard to even start to talk about the other things if you can't even say how expensive the financing is in a way that helps you contextualize it and compare it to other options. APR is the only metric that enables an apples-to-apples comparison of the cost of financing regardless of how long the financing is for, regardless of the combination, whether it's all interest or all fees or a combination of both. It's the all-in cost over a common unit of time, which happens to be the year. It could just as well be the month or the day, but as a matter of convention in finance, it's the year. And if you don't know the APR, then you can't really tell how much it would cost to use one kind of financing relative to another kind of financing over time. But once we've gotten laws passed in some states to require disclosure of the APR, we've also worked to do things like prohibit junk fees to protect business owners against financing practices that are unfair, deceptive, or abusive, to protect business owners from being harassed in the collections process if they can't pay a loan. You still should pay what you owe, but you shouldn't be harassed while you're paying and so on. So there's a lot of solutions and there's probably going to be no silver bullet, but it's crazy that all of the fixes that have been put in place for good reason in consumer finance to protect people from getting scammed and ripped off and overpaying and to create a financing market that is hopefully competitive and helping prices come down. Those fixes generally just aren't there if you're a small business owner. And so there's a lot of, um, a lot of fixes that are needed, but we think transparency is an important place to start.

Speaker A What was the situation with Paloma, Louis? Was any law broken there? Was there any recourse for her when she did figure out that she was paying 170% and not 13%?

Speaker C Yeah, well, Paloma refinanced and she's on her way, so that's good for her. You know, that particular financing didn't do the disclosures as far as I can see, and it happened like the month before the Small Business Truth in Lending Law that we got passed in California came into effect.

Speaker A So if that happened now, if that happened today, that lender would be breaking the law

Speaker C if they didn't do the transparent disclosures that are required by law in California and in New York and as of a month ago, there's a new law just passed in Vermont that requires them, then that company would've been violating the law. And usually trouble travels in packs, or someone would have a pithier analogy, but this is a shady part of the market, and I would be surprised if there weren't other things, other laws that were broken. And when business owners find themselves in this kind of financing, they're often are sort of emergency recourse options they can do working with a lawyer. Sometimes the best option is bankruptcy, sadly, once these have piled up the way Ami described, and that can help. Sometimes lawyers will be able to defend the small business and say, hey, there was something about this financing that wasn't fair or wasn't right.

Speaker E There's something else that is nitty, but it's just important to talk about. I have mixed feelings about this. When the Trump administration came in, one of the first things they— changes they made in the SBA is they prohibited us from being able to use an SBA loan to refinance an emerging cash advance or to refinance a factoring agreement. Now, if it's a short-term online loan with a fixed payment schedule or a line of credit, we can refinance that. But if it's a merchant cash advance or a factoring agreement, we can't do that. Now, the sad part about that is that it really limits our flexibility to help people before who got in trouble, and it gives them much less off-ramp options. The other side of that is that there's historical patterns in SBA data of People who, who get the merchant cash advances, uh, going in and refinancing and then quickly going to get another one and another one and getting them— they've addicted to the crack cocaine and they just can't get off of it.

Speaker D You know, there's an entrepreneurial side of this that would argue a lot of this is the symptom of the problem. And I just want to cover this because a lot of the people that are taking these loans, they're enticed into, shouldn't be borrowing money. And it comes down to 3 things generally. They've lost control of their inventory. They got to watch what they're buying more, and that's something one has to learn when they're in business. You can't just keep— you got to watch your inventory, make sure you get rid of stuff that's not selling. 2, they're not managing their receivables. Doesn't take long before you find out when you have receivables, they need to be managed. People are not going to pay their bill on time, and that's a skill set that one has to develop. And thirdly, If you're growing super fast and you need money, maybe you're not charging enough and you should raise your prices 3% and then you wouldn't need to borrow money. Because my argument is, and I've lived in all of those, a lot of the people borrowing money shouldn't be borrowing money.

Speaker E All the time, Jay. The first thing we, we gotta try to get into, especially when people call and they, they think they need money very quickly, which typically means more expensive options. The next question is why, and have you explored cutting expenses? Have you explored stretching payables? Have you cut some overhead? Why do you think you need money? And then the next question is, if you need money quickly, how much do you need and why? And come back to me with a cash forecast that shows me actually how much money you need in the next 30 days or in the next 2 weeks or the next 6 weeks or the next 8 weeks. And oftentimes they can't even answer those questions, right? So that's the type of education, like almost like the crisis hotline. And it comes down to bad systems and mentoring and processes. It's pretty fascinating for me. And we live this all day, but my 24-year-old daughter, which is super cool, is— it quit her job and she's doing her first startup.

Speaker C What's she doing, Ami?

Speaker E She's doing the Loyalty Lane. It's like gift, it's like gifting services for businesses, like giftology for businesses. And any moment of the day, she's kind of working outta my office now and sharing the office where she can be creating gifts and doing something creative. She's happier than a pig in boop, boop, boop, boop, boop. And any day you dig her into processes and making sure she's pricing properly and controls in her accounting systems, She looks like she's about to cry. Fortunately, she's got me making her do that. Most small businesses don't. So we can't forget that most small business owners and entrepreneurs don't know how most of this stuff works. It's just not how their brain is wired. They got into their business because they have a passion for something. And I always advocated for something like Teach for America, but like Accountants for America or something. Resources to help. Like, my daughter's going to be okay because I'm on her and I'm— she's going to kill me, but I'm pushing her every day to get her to put the right scaffolding around her to help her get her sales tax right and this right and that right and her systems right and her pricing right. 99 out of 100 people who start don't have that.

Speaker D That's true. Everybody doesn't have an army.

Speaker E She might shoot me. Okay. Or I might shoot her. One of us will shoot each other first. But most people don't have that. She doesn't know how lucky she is, right? So what can we do to make sure that people get the right financial scaffolding and support and mentorship early and upfront so that, because problems are going to happen.

Speaker A Lewis, this argument sounds so black and white, like who could disagree with anything you guys are saying? And yet, You're not winning all of the lobbying battles. I mean, why do you lose when you lose? What's the argument against disclosing an APR?

Speaker C Yeah, the arguments keep changing. It used to be, it's impossible for us to compute APRs. Then they admit that they can and they do, because the APR that they're going to charge a business owner is the same rate that they expect to earn. So they're a financing company. They know what they are targeting to earn. So then the ball shifts to, No, we can't do it. We don't want to do it. It's misleading. It's just a whole bunch of stuff. I mean, at the end of the day, it is a black and white issue. And the way that the high-priced financing industry that is opposed to transparent pricing wins is they hire great lobbyists that are politically connected. And when these bills are debated in public and see the light of day and the merits are weighed, this law gets passed. And when it happens in a back room, when they're able to do the deal with lobbyists in the back room, they, they do often win. And it's just a, it's just the same thing as the rest of democracy.

Speaker D The key to this is no one's saying they should go out of business. We're just saying be upfront with your pricing and let people decide what they want to do. But we're not saying they shouldn't exist. We're just saying be transparent with your pricing. That's all.

Speaker A That's a great point, Jay. Ami, I'm curious how you look at that. Where do you draw the line between legitimate high-risk lending and Predatory lending. When are these loans needed and perhaps even helpful?

Speaker E This industry is older than prostitution and it's never going away. The question is what education scaffolding and support do we put in there to help entrepreneurs so they don't get obliterated? It's sad for me who spent 98% of my life deeply immersed in SBA and SBA policy and helping businesses with SBA loans. I don't think there's many people in the SBA even looking at or understanding the implications of the site to the market. So like, there's always this inherent trade-off between all this stuff, and I don't think these issues are just black and white or simple. In the Biden administration, they took off a lot of the scaffolding to make it easier for borrowers to get SBA loans. And you would say, maybe that's a good thing and it made it easier. So less tempting to go get one of these loans. Well, defaults went through the roof and the Trump administration came in and they tightened that stuff right back up. And it's a taxpayer-backed program and they should have done that. I don't blame them for doing that. Conversely, then they accelerated the growth of these things. So there are a lot of trade-offs in all this. that have to be considered, and it's just not so black and white. I don't think one thing fixes this.

Speaker C And one tool that we've created to help with that, so the thing that brought together the Responsible Business Lending Coalition, which is 1,000+ small business groups and nonprofits that work with small businesses, community groups, civil rights groups, and for-profit lenders to small businesses all got together. And that was Ami was one of them, was to create a set of standards to distinguish exactly your question. How do you tell the difference between responsible and irresponsible lending? And that document is called the Small Business Borrowers' Bill of Rights, and it's 24 specific practices that get grouped into 6 rights, like the right to transparent pricing and terms, the right to responsible underwriting, the right to fair collections practices. And these are practices that any kind of financing can follow, even if they're high risk and high cost, even if they're a traditional bank or a non-bank, anybody can follow. This is kind of the standard practices, but it's all put there in one place and that would really help. And that puts the burden on financing companies to just do what everybody would think is important to be a responsible financing company rather than putting the burden on Small business owners who are often folks like Ami's daughter who have a vision and an insight for a product that would sell, but they're learning and they're new and they might not be experts in finance yet.

Speaker E She signed up for QuickBooks because it's, I think, the best platform, especially with her sales tax and this and stuff. I was pissed off too that she's paying $59 a month to QuickBooks, who immediately is starting to sell her finance.

Speaker C But to the question of, Lauren, also, how do you tell the difference between when financing is just high cost, high risk, and when it's predatory or irresponsible? One way of thinking about that that I think is useful is looking at incentives. And if a financing company's interests are aligned with the borrower, if the financing company is going to make money if the borrower makes money, then I consider that financing likely to be responsible financing. For example, if you as a small business owner, if you run out of money at the end of the month after you make payroll, after you make rent and you can't pay the financing company and the financing company doesn't get paid, that financing company has a strong incentive to only give you financing that you can actually afford and will help you grow over time. However, the financing company uses tools that insulate themselves a lot from what happens in your business and they can make money whether or not your business is failing or succeeding, there's a moral hazard problem, as they would say in the insurance industry. There's an incentive misalignment there, and that category of lending I consider potentially irresponsible because that lender, they're not necessarily taking responsibility for whether their financing is helpful to the business.

Speaker A How can a borrower determine if that's the case?

Speaker C Well, I want to lay out a third category and Didn't answer that question.

Speaker A Sorry.

Speaker C The third category is some models of financing actually make more money when the small business can't afford it. And that's the dynamic that Ami was talking about where they pull you in with one deal and then when you can't afford that deal and you're strapped for cash, your cash flow is shot because their financing is so expensive in part. And then they can sell you another one and they get you to flip your loan over and over and over again, just like a payday loan. They make more money when you're stressed. I talked with another woman who, she had a puppy rescue in Southern California and she put her house up on that deal. She got $450,000 in financing and within 11 months this financing company was foreclosing on her home for $1.2 million. They made more money by her failure to try to take her house than they would have by her actually repaying the financing. And I consider that completely misaligned incentive to be predatory lending. Now, how can you tell the difference between whether the incentives are aligned or not? Those details are what we tried to put into the Small Business Borrowers' Bill of Rights. And so one thing that business owners can do is find that it's on our website, the Small Business Borrowers' Bill of Rights on borrowersbillofrights.org. And you can ask your lender, are you a signatory of the Small Business Borrowers' Bill of Rights? Do you follow these standards? And that's one way to tell.

Speaker D You know, you answered the question. The fact is they are insulated and here's how. They're getting 150%, 200% interest. They know they're gonna lose, you know, a tremendous amount of people going bankrupt, but it doesn't matter because they're charging so much they can afford it. It's all built into their business model. Nobody's making 200%. A lot of those people are going broke, but it's almost reversed to supply and demand. There is so much demand and so much supply that the interest rates have gone into the stratosphere and they get away with it. 'Cause people don't understand that. I personally think showing the APR would in fact solve most of these problems. I might disagree with what— I think it is a little black and white. Show the APR, most of this is going away.

Speaker E Big red letters, 200 font, Jay.

Speaker D Yeah, done. Lauren, make that happen.

Speaker C Or if the listeners wanna make that happen, I wonder if there's a way that they can get in touch because we are working to make that happen right now. We got it done, like I said, in California and New York. In Vermont, it's partway done. We're working in Connecticut, we're working in Massachusetts, we're working in Maryland, we're working in New Jersey, we're working with UJ in Illinois and other states. And so if a small business owner wants to see that protection for them and their colleagues in their state, we also have a federal bill, by the way. But reach out.

Speaker A Where should they reach out to you, Louis?

Speaker D info@borrowersbillofrights.org. Thank you, Louis, from a million entrepreneurs in the country. What you're doing is a great and noble cause, and I think it's an incredible thing you're doing.

Speaker C Thank you for being a friend in that journey, Jay, and, and all of you.

Speaker A My thanks to Jay Galtz, Ami Kassar, and Louis Kaditz Peck. And a special thanks to our sponsor. This episode was brought to you by Grasshopper Bank. Thanks for listening, everyone. Before you go, If you get something out of these podcast episodes, it would be a huge favor to me and to the entire 21 Hats community if you could tell just one other owner about them. Your word of mouth, owner to owner, will always be the most effective way to build this community for all of us. And don't forget about our other offerings: the monthly mastermind on Zoom where you get to join the conversation, the upcoming Succession Solutions Workshop and our annual 21 Hats Live in-person events. And of course, if you have a question or suggestion, you can always email me at lauren@21hats.com. This episode was produced by Jess Thuberan, founder of Blank Word Productions. Thanks again for listening.