You’re Pre-Qualified for a 13% Loan! (That Really Costs 170%)
In this week’s podcast episode, we ask a simple question: What could be wrong with requiring small business finance companies to disclose the true annual percentage rate they charge?
Good morning!
Here are today’s highlights:
The co-founders of Andon Labs signed a three-year lease in San Francisco to see if AI can run a retail boutique. It’s not going great.
Most business leaders are either “AI wishers” or “AI washers.” And you?
The live-shopping app Whatnot is attracting a lot of criticism for being too good at selling stuff.
Turning themselves into creative micro shops, vending machines are making a comeback.
THE 21 HATS PODCAST
This week, we begin with the story of Paloma Corona, the owner of a thriving preschool in Los Angeles who needed money to expand to a second location. She thought she was borrowing at an annual percentage rate of 13 percent. In reality, the effective APR was 170 percent. She also thought she was taking out a loan. Instead, she was placed in a merchant cash advance—an increasingly common form of financing that can sidestep many of the laws governing traditional loans.
The daily payments quickly began draining not only the profits from her business, but also her personal savings. Her business survived, but only because a nonprofit lender stepped in to refinance the debt. Paloma’s story is especially troubling because she wasn’t reckless, uninformed, or running a failing business. But she was up against a financing industry that has become remarkably skilled at making extraordinarily expensive money look fast, easy, and affordable.
My guests this week have all been fighting this problem from different vantage points. Jay Goltz owns a picture framing business and a home furnishings store in Chicago. Ami Kassar helps business owners secure SBA and other responsible financing. And Louis Caditz-Peck, who helped build LendingClub’s small business operation, is now executive director of the Responsible Business Lending Coalition.
In our conversation, we talk about why good businesses get steered into bad financing, how brokers can earn more by recommending the most expensive products, why offers embedded in platforms such as QuickBooks, PayPal, and DoorDash can be especially tempting, and what business owners should do before accepting fast money. We also ask what seems like a remarkably simple question: What could possibly be the argument against requiring every small business financing company to disclose, clearly and prominently, the true annual percentage rate it is charging?
You can subscribe to the 21 Hats Podcast—brought to you by Grasshopper Bank—wherever you get podcasts.
