April 23, 2023

Dope Sick: Are Predatory Lenders Shaping Regulations and Policy?

Happy Sunday, friends! I hope you enjoyed my conversation with Ben Lozano, CEO of the SMBX on our first podcast episode. Check it out here (and subscribe!) if you haven’t had a chance to listen in yet. Yes, that was a shameless plug.

Today I wanted to continue my series on the dope sickness caused by predatory capital in early stage markets. Several of you have offered to participate in this conversation going forward, and some of you have even offered up resources to help. Hoda Salman from Nawa Impact shared this detailed guidance from a separate effort a few years back that aligns well with the goal of ensuring capital providers do no harm. The overarching principles here (Appropriate Product Design, Prevention of Over-Indebtedness, Transparency, Responsible Pricing) are what the market needs today, along with some education of entrepreneurs who don’t know what they might be signing up for. Hoda shared that this guidance emerged a few years ago “when the microfinance space was facing increasing controversy over client over-indebtedness and other irresponsible microlending behavior”. Sounds familiar to me.

I think this framework and this guidance work really well as a starting point, and it aligns with my general thesis that capital providers should first seek to do no harm. If any capital provider starts with that premise, very little can go wrong from there.

I noticed in my reading of the recent news out of various states that something called the Revenue Based Financing Coalition is lobbying lawmakers. This coalition’s key assertion appears to be that APR disclosures should not be necessary, or should be significantly watered down, because it is impossible to tell when a borrower will pay back an RBF deal because payback is a function of revenue. I get that; it's true in the strictest sense unless there's a hard maturity date. But I’m concerned because this looks like a group of MCA providers lobbying under the pretense of RBF. We all know MCA can be very costly for a small businesses, which is one reason several of you have shared your concern about the confusion this causes in the market around RBF. You can see their filing with the state of Connecticut here.

I don’t agree with their assertion that APR disclosures aren’t necessary. Look, I don’t love regulations, but I think that disclosures are necessary, just as in the examples I shared from Hoda above. Plus, this coalition looks to me like a group of MCA providers lobbying for the freedom to obfuscate cost of capital so that entrepreneurs really don’t understand it. What am I missing here?

Am I misreading the intent of this coalition? And who are the members of this coalition? Let me know what you think. And if you can get me in touch with this group, please let me know. I’d love to meet then and get a better understanding of what they’re working on.