It seems like a given for consumers to know exactly how much their credit will cost them. When you take out a personal credit card, mortgage, personal loan or any other type of financing, you’re given details of exactly how much you’ll be paying. This is all thanks to the Truth in Lending Act of 1968, which requires lenders to disclose details such as interest rate, payment schedule, overall cost of credit and other crucial details to the particular lending product in question.
Unfortunately, small businesses have not enjoyed the same protection that individual consumers have. Business lenders have not been required to disclose the same type of information to small businesses, which has allowed some lenders to overcharge or to engage in predatory lending practices, leading to the demise of too many small businesses.
Now, however, a new bill has been passed in California which could help change this on a nationwide scale. SB 1235 was signed into law by California Governor Jerry Brown on September 30, and will go into action on January 1, 2019. This new law will require financial institutions to disclose key information when lending to small business owners.
Levi King, Founder and CEO of Nav, provided testimony in support of SB 1235: “Consider the impact this legislation can have. Small business employs nearly half of all of (California’s) employees. But, according to the US Department of Labor, 100,000 California small businesses close each year. And the data show a top reason these businesses fail is due to poor credit arrangements.”
A significant factor behind lenders’ unwillingness to share such information is the assumption that all businesses have the same ability to understand the impact of certain types of financing. The reality is that not all registered LLCs are built the same. Your mom-and-pop store on the corner may be the same type of legal entity as a larger business on the top floor, but their knowledge and resources are quite different.
“I’ve lived through the pain of trying to figure out complicated financing documents,” added King. “If you haven’t experienced it, it’s easy to say: “the borrowers will figure it out. They know what they’re doing.
“The reality is that small business owners are not financial experts. These are not Fortune 500 companies were talking about. In fact, 75% of all small businesses employ one or fewer people. These are businesses without a finance department. They can’t spend hours and hours trying to decipher loan disclosures. That’s why an annualized cost of capital needs to be a part of this legislation. It’s the best method we have to create a quick apples-to-apples cost comparison. We’ve had this protection for consumers for years. It’s already settled law.”
It’s important to note that not all lenders have withheld this key information. They’ve understood that disclosing annual rates not only keeps them in competition with other lenders, it’s also the right thing to do. The issue are the other group which chooses to follow unsavory lending practices and, in the end, put the business owner on the short end of the stick.
Knowledge is power, and SB 1235, once in practice, will allow small business owners to have the knowledge they need to make the right decisions and grow and strengthen their business.