Small Business Lending Leaders Prepare for Possible Regulatory Changes

Access to capital is increasingly tough for companies of all sizes. As CFOs have been searching for capital to grow their business in 2024, so too have small business lenders faced challenges to provide capital to growing organizations. Now, new legal challenges have added to lenders’ efforts.

Just this week, New York Attorney General Letitia James sued multiple small business lenders across her state for what she says are “predatory lenders taking advantage.” Multiple states have introduced disclosure bills in 2024 around products such as merchant cash advances (MCAs). Early this year, the National Alliance of Commercial Loan Brokers (NACLB) had its owner named in a receivership pursuit, with the owner’s home being raided by the FBI and the company filing bankruptcy.

The regulatory environment is a key component of how small business lenders will operate in the future. While some finance leaders in the industry have a positive and proactive approach, others believe the regulations’ origins may be misguided.

Positivity and Preparation

Anthony Rose, CFO of lender Kapitus, said his organization embraces regulation and is actively preparing for it. For him, it’s all about embracing, communicating, and proper planning.

“I would say for us, [regulation] is super top-of-mind right now,” said Rose. “I was having this conversation recently with our general counsel. For us in particular, we are really supportive of the regulation that may be coming to our industry. We support disclosure, transparency, and common-sense regulations. We support licensing in the small business [lending] space, too.”

Rose also has a personal interest in regulations. “I’ve always told my wife, I want to write a book about where I came from, the banking industry, and share my take on how regulation works in that level of finance,” he said. Though inclined to keep his takes on regulation to himself and his future writings, Rose did share that his recommended approach to other CFOs preparing for new regulations is to focus on the “very, very long term.”

Much like any other challenge, Rose looks at pending regulations with a positive spin and a proactive approach. He credited his team and communication within his finance team as a supporting factor in his company’s preparation. “In general, we’re big fans of what the regulators aim to do,” he said.

Are Regulators Misguided?

“I have a traditional accounting background, I came up as a CPA and then became a CFO, but I wasn’t happy managing people like a CFO has to, so I made the switch,” said Rich Rose, managing director at Rainstar Capital Group and former CFO of Mitchel Sweet and Associates, an insurance services provider. Rainstar Capital is a private equity firm that invests in consumer distressed debt portfolios. “I came into this [industry] with a really unique perspective, and I believe I understand how all of this regulatory stuff has become such an issue,” he said.

While products like MCAs have no true interest rate due to an agreement for cash now in exchange for future earnings, attempting to calculate an interest rate on a product like a cash advance isn’t the right way to quantify regulation, Rose said.

“Regulators are saying that people shouldn’t be paying high interest rates, and they are protecting the business owner,” said Rose. “There’s an argument to be made that there are a lot of people selling MCAs out there that have no idea of the mathematics behind how the product works. Most of these people are based in New York or Florida, and it reminds [regulators] of the movie “Boiler Room.”

Although regulations such as licensing may help improve the quality of services and transparency provided by loan brokers, Rose argues that regulators have the wrong goal in mind.

“It is not the government’s responsibility to protect the business owner from their own stupidity,” Rose said. “They’re going to [take the loan] anyway, in order to make payroll on Friday or get the inventory they need; they’re going to figure out how to get that money one way or another.”

“Regulation needs to be on the enforcement side. If an MCA goes bad, collectors will collect however they deem necessary,” Rose said. “It’s not really about disclosures, because, like I said, the business owner will get the money anyway to keep his business alive. I think the industry really needs help in creating a [fair process] for both sides when the loan fails to be paid back.”