On May 8, 2019, the Federal Trade Commission hosted a small business financing forum to examine trends and consumer protection issues in this market, including the recent proliferation of online lending and alternative financing products. The forum took place in a series of 3 panels:
- Panel 1 – Small Business Finance Market Overview – comprised of representatives from the Federal Reserve Bank, the Electronic Transactions Association and several online marketplace lenders.
- Panel 2 – Merchant Cash Advance Case Study – comprised of brokers, merchant cash advance (“MCA”) product providers and Hudson Cook partner Kate Fisher.
- Panel 3 – Consumer Protection Risks and the Way Forward – comprised of representatives from small business advocacy groups, online marketplace lenders, the Federal Reserve Bank and the US Small Business Administration.
The roundtables suggest that the FTC is grappling with several concerns. Some of the main themes that emerged during the forum were:
Small Business Financing Really Matters. There was broad consensus that small businesses are vital to the health of the US economy and an important source of jobs. Ensuring that small businesses have access to capital is important, but the FTC is concerned that they may be treated unfairly by funding sources that (some believe) have superior bargaining power.
Disclosure. The subject of disclosure came up several times. FTC moderators wanted to know:
- What types of cost of credit information are provided today?
- Is it possible to provide information that allows for a meaningful comparison of the many types of small business finance products on the market (e.g. fixed loan, variable loan, factoring, merchant cash advance, equipment lease)?
- Are disclosures provided to companies early enough in their search for financing?
Collection practices. The FTC has taken particular interest in the collection practices of MCA vendors, with particular emphasis on admissions of judgment (“COJ”). Panelists discussed how COJs are used and why the policy rationale for the current ban on COJs in consumer finance might not apply with equal force to small business finance.
Do small businesses deserve protections like those given to individual consumers? Simply asking the question implies that the answer is yes. In the panels, there was consensus that small business owners are sophisticated when it comes to understanding their own business. However, there has been some debate about whether small business owners are savvy enough to understand the financing products available to them.
Closing remarks were delivered by Andrew Smith, Director of the FTC’s Consumer Protection Bureau. Mr Smith noted that he was “surprised” at “how little oversight” is being applied to small business loans at the federal level. After raising concerns about the potential for deceptive sales and marketing and unfair collection practices, Smith proposed that the FTC has a “special role” to play in small business financing, because the scope of the FTC statute gives the FTC the power to regulate behavior that affects both individual consumers and professional consumers. He gave examples of past FTC actions to protect professional consumers from what the FTC considered unfair and deceptive practices.
The FTC considers its primary mission to be to prevent unfair and deceptive acts and practices in the marketplace. The type of activity that the FTC might consider “unfair or deceptive” is relatively broad and fluid. Therefore, it is difficult to make predictions about how the FTC might try to regulate small business financing. The FTC’s choice of panelists and the questions posed to them during the forum can provide some insight.