The Main Street credit gap has become such a well-accepted fact that whole waves of startups have launched, often armed with impressive-sounding technology, to improve small business owners’ access to capital. Many of those new firms, including OnDeck, which has loaned small businesses more than $1 billion since 2007, and Kabbage, which loaned more than $200 million last year, are largely unregulated.
Critics calling for regulation of alternative lenders have pointed to high borrowing costs, which often top 50 percent on an annualized basis, and lack of transparency, especially among the brokers many lenders rely on to bring in business. On the other hand, “there are some who say the marketplace is solving the problem,” said Karen Mills, former head of the Small Business Administration, in a recent interview. “You have innovators and entrepreneurs coming in, and you don’t want to get in the way of this too soon.”
Mills wouldn’t take a firm stand on whether the new lenders should be regulated. But she knows Main Street’s borrowing woes well. Her tenure as head of the Small Business Administration began in the dark months following the financial crisis and roughly coincided with a 20 percent decrease in small business loans. This week she published a detailed account (PDF) of the current state of bank lending to small business, hinting at the role the government might play in helping Main Street companies access credit.