According to recent estimates, the subprime business loan market has grown to over $3 billion a year. This growth has been driven by increases in both the demand for subprime business loans and in the number of new alternative lenders willing to supply these loans. Some worry that the growth of subprime business loans, which often carry interest rates above 100%, could portend another financial crisis. If enough small business borrowers take out costly loans they cannot afford to repay, the consequences could be dire for entrepreneurs, lenders and the economy.
Subprime business loans can indeed be risky. The problem is that alternative loans are a crucial resource for many entrepreneurs—particularly startups. Many startups cannot obtain funding through the Small Business Administration's 7(a) loan program. The time and paperwork involved in securing a loan may be too much for startups experiencing rapid growth to handle, or they might not yet qualify for traditional loans from banks. The solution, therefore, is not for alternative lenders to stop financing subprime borrowers but to ensure that borrowers are able to access loans at competitive rates.