A bill pending in California legislature would mandate that online small business borrowers would receive standard price disclosures.
Proposed by Sen. Steve Glazer, the bill passed the Senate and is heading to the Assembly, according to the American Banker. If the measure passes, it could be a model for other states.
The bill would require that any person engaged in the business of commercial financing to provide a written statement disclosing the full amount of any fees charged in connection with the commercial financing, the total amount of funds provided by the commercial financing, the estimated annualized cost of capital, the term length of commercial financing, the total monthly payment amount owed by the prospective borrower, the annualized interest rate, a description of the funding and repayment process, among other requirements.
It would require commercial lenders to disclose the price of financing in a way that would allow borrowers to compare multiple offers. This is in contrast to the consumer finance industry which has federal regulations that require lenders to disclose the loan’s annual percentage rate. According to the American Banker, the rate shows what the total cost of credit would be on a yearly basis.
A 2016 paper co-written by Karen Mills, a former head of the U.S. Small Business Administration, found that short-term lines of credit from online small business lenders often have annual percentage rates around 50 percent, while annual percentage rates on merchant cash advances sit between 60 and 70 percent.
Short-term lenders argue that annual percentage rates could be misleading.
According to a 2017 survey of small businesses by the 12 Federal Reserve banks found that 35 percent of borrowers approved by online lenders were satisfied with their online lending experience. This compares to a 49 percent satisfaction rate at large banks, a 73 percent satisfaction rate at small banks, and a 74 percent rate at credit unions.
The bill would include an exemption for banks and credit unions. The bill would apply to small businesses that borrow $500,000 or less.