As the government's small business lending program struggles to find its footing, many online and alternative lenders say they're filling the void, offering to help merchants tap into federal funding designed to ease the economic pain caused by coronavirus.

But because most of these lenders are not yet approved to handle Small Business Administration (SBA) loans directly, some experts fear that merchants may be targeted by unregulated lenders and wind up with loans costing far more than the 1 percent, two-year deal the government is backing.

"I’m already seeing an uptick in how many predatory lenders are using this language to get small business people to borrow online," said Renee Johnson, senior government affairs manager at Main Street Alliance, a small business advocacy group. "They talk about it like they are part of the SBA program but they are not."

Online lenders, often known as financial technology firms or "fintechs," have flooded the small business loan market in recent years. They face fewer regulatory restrictions than banks and say they can turn around loan applications more quickly, getting help to small businesses fast.

Also known as "nonbank lenders," they differ from traditional banks. Most are funded not by customer deposits, but by hedge funds and institutional investors. They aim to be more technologically nimble and take on risks and customers that big banks shun.

But the lack of regulatory oversight in this arena has allowed some alternative finance companies to charge sky-high interest rates on their non-SBA loans, ranging from 60 percent to a high of 400 percent, according to congressional testimony. That raises concerns about how customers seeking SBA loans will be handled, or if they could be subject to future marketing for the lenders' other high-interest rate products.

Online lenders and fintech firms have been lobbying hard to become authorized SBA lenders and on Thursday, the Treasury opened that door, publishing a form these companies can use to apply for approval. On Friday PayPal Holdings and Intuit QuickBooks Capital became among the first nonbank lenders to gain approval to participate in the program.

"Tech companies have been trying for years to get access to banking charters while avoiding the requirements that protect consumers and keep our financial system safe and sound," said Sen. Sherrod Brown of Ohio, the ranking Democrat on the Senate Banking Committee. "It's especially egregious that they are taking advantage of a global health crisis to continue pressing for an unfair advantage over community banks."

Sen. Sherrod Brown is a ranking member of the Senate Banking Committee. Andrew Harrer / Bloomberg via Getty Images

Even before coronavirus hammered the U.S. economy, small businesses faced high hurdles in securing loans from traditional banks, and alternative arrangements with unregulated lenders were yielding stratospheric effective interest rates and aggressive collection tactics that imperiled small merchants, as reported by NBC News.

Since the 2008 recession, small businesses that need cash have increasingly relied on online lenders and merchant cash advance companies that agree to lend based on a merchant's future receipts.

Such lenders accounted for up to one-third of all small business loans in 2018, according to the Federal Reserve's latest Small Business Credit Survey. Online lenders provided a combined $10 billion in funding to small businesses last year, according to Kabbage Inc., one of the larger platforms in the arena. The usual model for a firm like Kabbage is to connect a borrower and a lender and collect a fee for the service, rather than lend money directly.

$349 billion to help small businesses

Recognizing that many small businesses were being hurt by coronavirus, Congress passed a law on March 27 providing federal backing for $349 billion in low-cost SBA loans to companies with fewer than 500 employees. The loans can be forgiven if certain guidelines are met and can only be provided by lenders approved by the SBA.

On Friday morning, the SBA reported that there have been more than 587,000 applications approved totaling over $151 billion.

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But merchants nationwide have had a tough time gaining access to the government's program since it launched on April 3. Banks authorized by the SBA to handle the applications have been swamped by applicants, and applicants have endured long wait times and system crashes.

The program's "first come, first serve" approach has also resulted in an uneven playing field where borrowers who already bank with approved lenders get their applications pushed through the system, receiving money before others who don't have those relationships.

The bumpy rollout has created an opportunity for the unapproved, nonbank lenders.

Kabbage has been among the more aggressive fintechs offering to get borrowers into the new, coronavirus-inspired SBA loan program. Kabbage is not yet an SBA-approved lender under the program. Like other nonbank lenders, Kabbage is applying for approval, but for now cannot itself lend money to applicants. Instead, it can only act as a service provider, connecting borrowers with lenders for a tiered fee of up to 1 percent.

Despite that, Kabbage began soliciting applications from merchants seeking loans under the government program on April 3, urging them to apply on its simple online platform.

Initially, Kabbage's website failed to note that it was not yet an approved lender under the program. Other fintech lenders, including Square and OnDeck, did not solicit applications, making it clear from the outset that they were not SBA-approved.

Asked by NBC News about this discrepancy, Kabbage spokesman Paul Bernardini said in an April 3 email to NBC News that the company was in such a hurry to implement the SBA loan program that it "didn't nail a perfect landing." Kabbage quickly added language stating that it was not an approved lender and kept accepting applications on its platform.

By April 7, Kabbage said it had received 37,000 loan requests totaling $3.5 billion and was teaming up with a "technology-oriented bank" to help borrowers access the program. Bernardini declined to identify the bank.

No rate cap for loans

Founded in 2009, Kabbage has wealthy backers, including Softbank, the giant Japanese investment fund, and Mohr Davidow Ventures, a Silicon Valley venture capital firm. Kabbage is based in Atlanta and generated $2.8 billion in loans last year and over $9.5 billion since it began arranging loans in 2011.

In the past, Kabbage offered small business loans via Celtic Bank, a state-chartered industrial bank in Salt Lake City, Utah. Kabbage's website notes its relationship with Celtic, which began in 2014 according to an arbitration document. Under that arrangement, the document shows, Celtic appointed Kabbage to "develop and bring to market the program whereby the bank will provide loans to borrowers."

Because Utah has no specified interest rate cap on loans, its banks can charge borrowers significantly higher rates than banks domiciled in states with stricter laws. A former Kabbage customer said the effective annual interest rate on his loans with Celtic Bank reached 70 percent. Another Celtic Bank loan to a California borrower had an effective annual rate of 95 percent, according to a document reviewed by NBC News.

Celtic Bank did not respond to two texts and an email seeking comment.

Renee Johnson testifies before Congress about predatory small business loans. Main Street Alliance

Bernardini, the Kabbage spokesman, said these rates do not reflect the norm. "The average APR of typical Kabbage Funding is 38 percent," he said in an email, adding that rates can be as low as single-digit percentages through its custom loan products.

Kabbage was sued in New York federal court last September, accusing it of circumventing certain states' interest rate caps on loans to business borrowers. Kabbage is trying to move the matter out of federal court and into arbitration.

Bernardini declined to comment on the lawsuit's allegations.

In a recent interview, Rohit Chopra, a commissioner at the Federal Trade Commission, expressed general concern about excessive borrowing costs on some small business loans outside the SBA program.

"We need to look much harder at some of these extortionate terms," he said of the FTC. "We need to show we are there to protect American small businesses."

A 'Byzantine' process

Bob Thomas, co-owner of Saltaire Hotels, a group of boutique properties in Massachusetts and Vermont, experienced difficulties applying for the SBA loan program through Kabbage. He hoped to gain access to the Paycheck Protection Program after his hotels closed amid the coronavirus, he said. He needs money to keep paying his employees and to service existing debt on his properties.

The Ellery Hotel, a colonial style B&B in Northampton, Mass., acquired and renovated by Bob Thomas and Dierdre Savage, Saltaire Hotels co-owners. Courtesy of Saltaire Hotels

Thomas said he'd tried Kabbage at the suggestion of a local lender working with the fintech company. He applied April 7 and after submitting personal and financial information, including the Social Security numbers of his investors, he hit a dead end.

He uploaded some documents, then the next screen asked him to upload more documents from a list. But the list was blank and there was no way to continue with the application.

He tried logging out and back in and then called the helpline. After holding for 15 minutes, he reached a voicemail. He left a message and sent an email to the address listed on the website.

"I haven't heard anything back yet," said Thomas. "It's frustrating." He called the process "Byzantine."

Bernardini said he was sorry about Thomas's experience but added that it may have reflected a "bug" in Kabbage's system that was quickly fixed. "We're experiencing high volumes of calls and are working through them as quickly as possible," Bernardini said in an email.

He provided NBC News with tweets from five Kabbage customers who had posted about their positive experiences during the application process.

Kabbage has had other problems. Late last month, as coronavirus spread, the company abruptly cut off funding to clients. Bernardini said the cutoff was necessary for Kabbage to convert its system to respond to the virus crisis.

Like other lenders, Kabbage bundles its loans into securities that it sells to investors; such securities typically require an issuer like Kabbage to repurchase loans that go bad quickly. This requirement put financial pressure on Kabbage in recent weeks, Bernardini said, forcing it to use cash to buyback troubled loans that it would otherwise have lent out to its clients.

Kabbage has also furloughed workers, Bernardini said. He declined to say how many but said the company had recently rehired some employees.

"Fintechs have the capacity to help provide funds to traditionally unserved and underserved groups, which can help us in the days ahead," said Rep. Emanuel Cleaver, D-Mo., whose office has investigated fintech lending to minority borrowers. "However, all financial institutions should be seeking to design loans on the most favorable terms to borrowers during this crisis, because when the sun sets on this pandemic, there will be a reckoning for all those who victimized the vulnerable in their darkest hour."