WASHINGTON – Catarah Coleman started her own bakery, Southern Gal Desserts, out of her Los Angeles home. When she and her business partner appeared on Food Network’s popular series “Cupcake Wars,” sales took off.

They expanded and hired 20 people. Having been turned down by traditional banks, Coleman took out a $40,000 online loan set up by a broker she knew from church.

Pretty soon, she was trapped in a cycle of debt. She didn’t realize she was paying 56 percent interest.

“We were under the impression it was a lot lower,” she said.

Short of cash for rent or to pay her workers – and hounded by letters, emails and texts from companies offering her more money – Coleman eventually found herself drowning under four loans.

Her experience and others like it are reminiscent of the controversy surrounding high-interest payday lenders and are drawing scrutiny to the online loan market for small businesses. Even some major lenders say they’re distressed by the practices of their competitors.

Some lenders give money to small businesses with little consideration of their ability to repay without taking out new loans. Some lenders mislead borrowers about interest rates, which can be as high as 300 percent.

In addition, some companies target small businesses with outstanding debt, with little regard for putting them deeper into the hole.

Consumer groups and at least one online lender are advocating protections, including requirements that interest rates be described clearly.

But, like proposed rules on payday loans, it’s uncertain whether the incoming Trump administration will back those protections.

“I don’t know what Donald Trump we’re going to get,” said Brayden McCarthy, a former Small Business Administration official and White House economic advisor, now vice president of Fundera, which connects borrowers with lenders.

Trump has backed progressive proposals, such as limiting risky investments by commercial banks, embraced by Democratic Sens. Elizabeth Warren and Bernie Sanders, McCarthy said in an interview. But the president-elect has also promised to roll back regulations.

Some in the burgeoning industry are wary of regulations that could stifle their growing market. Their loans are important for small businesses that find it hard to finance with traditional banks to get started, hire workers or buy equipment.

But there are problems with the market.

Last year, Fundera and a coalition of online lenders announced they will abide by voluntary standards, saying they are troubled by practices of others in the industry.

The coalition noted that some lenders advertise interest rates based on a percentage of the loan or tied to a business’ revenue.

But that could be misleading.

Lenders might say the cost of a loan is 15 percent but the annual interest rate is really 50 percent, the coalition said.

Coleman said she should have asked more questions. But lenders should have been clearer about their terms.

In a May study, Opportunity Fund, a California non-profit, found that businesses who come seeking its help are typically buckling under loans with percentage rates of 94 percent. One loan carried an annual interest rate of 358 percent.

The group gives lower-interest loans to help small businesses owners like Coleman get out from debt.

On average, businesses seeking its help were required to repay lenders almost twice their monthly revenue.

One controversial practice in the loan market, called “stacking,” has already sparked lawsuits.

Lenders using the strategy check public records to see who’s borrowed from other lenders, then try to get those borrowers to sign up for new loans.

In one lawsuit, RapidAdvance accuses Pearl Capitol of using “high pressure sales tactics” to lure a Louisville, Kentucky, chiropractic clinic into financing on top of its $31,000 loan.

Pearl Capitol debited the chiropractor $165 per day, leading it its failure to repay RapidAdvance, the lawsuit says.

The practice has led to many small business failures, RapidAdvance attorney Patrick Siegfried said in an email.

In an unsuccessful petition to dismiss the case, Pearl Capitol said it had done nothing improper. It denied pressuring the clinic, saying RapidAdvance is complaining abut a “run of the mill” practice, like Visa offering a credit card to someone who already has a MasterCard.

Pearl Capitol CEO Sol Lax declined to comment about the lawsuit Thursday. Speaking generally, he said the company considers existing loans, as well as a business’ health, in determining whether to approve financing.

It’s not in Pearl Capitol’s interests to drive businesses under, he said. In addition to the expense of trying to collect, he said, “the optics would be terrible of us going to small farms and taking the tractor, or to a cobbler and taking the shoes away.”

He said the company’s decision not to advertise financing based on interest rates reflects new approaches to making money available to small businesses.

In a hybrid of a traditional loan and an investment, the lender buys a percentage of a business’ revenue. Pearl Capitol, he said, analyzes sales and finances to decide how much a business should be making each day.

The approach allows Pearl Capitol to consider other factors for a businesses that might not qualify for a loan based simply on its credit rating, Lax said.

However, McCarthy and Karen Mills, a former administrator for the Small Business Administration who is now a Harvard Business School fellow, wrote in a report Wednesday that not disclosing interest rates can be misleading.

Small businesses “don’t have armies of lawyers or advisors available to them to decipher complicated offers with hidden costs,” they wrote.

No regulators have explicit authority over online lenders, they noted.

In addition, the nation’s main lending law only covers regular consumers – not small businesses.

Kery Murakami is the Washington, D.C. reporter for CNHI’s newspapers and websites. Contact him at kmurakami@cnhi.com.

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