October 30, 2019
By Caity Witucki
Contributing Editor, SBA C-Suite Tips Wednesday
SBA C-Suite Tips Wednesday — Protect Small Businesses From Predatory Lending
According to the Sacramento Business Journal, recent data suggests that many of the same predatory financial tactics that plunged households into ruin during the 2008 recession are now being used in small-business lending. Small business borrowers using conventional loans are paying nearly twice what they can afford to cover for loan payments on financing that carries an average APR of 94%. As a result, small businesses are experiencing a loss in cash flow which is forcing them to default on their loans and close their doors.
To obtain affordable credit and maintain positive cash flow, small business owners must have the opportunity to understand the financing that they are being offered in a clear, concise manner that enables informed comparison across all financing options. However, many small business owners operate as solo business ventures without dedicated CFOs and legal counsel. Because of this, they have about the same level of financial knowledge as the average American household.
In response to exploitative small business lending practices, some states have begun passing bills that would protect small business owners. For example, California Gov. Newsom is considering AB 539, the Fair Access to Credit Act. AB 539 would cap interest rates on consumer loans of $2,500 to $10,000 at 36%. An additional thirty-six states already have caps of 36% and below, including Texas (30%), Kentucky (24%), and Arkansas (17%). Laws restricting interest rates have provided historic transparency for small business borrowers and have helped shape a positive lending landscape.
Even if you do not offer small business financing in a state that has passed a Fair Access to Credit law, you should consider providing small business owners with the tools necessary for making educated financial decisions. The more informed the borrower is, the less likely they will default on their loan.