How Much is Too Much?

By Charles H. Green

From Bloomberg Businessweek, that was a big question at a conference on small business lending on Thursday at the Federal Reserve Bank of New York, where executives from high-cost alternative lenders mingled with bankers and regulators.

Bob Coleman, who publishes the Coleman Report, a trade publication for small business Colemanlenders, put it to an executive from OnDeck, an online lender that charges annualized interest rates as high as 134 percent.

“Is that a reasonable rate to charge small business owners?” Coleman asked.

“We think it is,” said Andrea Gellert, the OnDeck executive. “APRs somewhat distort the true economic costs and the cost-return relationship on the loan.” To make that point, Gellert posited a hypothetical business owner who has a limited amount of time to buy discounted inventory. “If I buy that inventory for a dollar and sell that inventory for $2 in a six-month period, that’s a 200 percent return. So my 54 percent cost makes absolute sense. I will make that tradeoff every single time.”

Of course the problem is, every borrower isn’t accessing these funds for growth, but rather many get the cash for payroll, the rainy season and other survival tactics that are not repaying them 200 percent returns.

And another inconvenient truth is that virtually none of these high-priced innovative lenders are profitable yet. Their note buyers and lenders who actually fund this credit are doing just fine, but none of these familiar names has been waiving their flag about earnings growth. We’ll talk more about that later.

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