California Governor Jerry Brown signed into law the nation’s first bill that will provide protections for small business owners seeking online funding. The bill was met with support from both sides of the aisle, passing 28-6 in the Senate and 72-3 in the Assembly.
The bill is a reaction to businesses in the online lending industry whose practices have long gone without oversight, often leaving small business owners in compromising situations.
In 2015, California’s Department of Business Oversight (DBO) surveyed 14 marketplace lenders and found that loans from some of less above-board lenders carried APRs ranging between 41-101% or higher. Some borrowers were stuck with unaffordable loans that averaged annual percentage rates around 94%—one loan even had an APR of 358%.
“I applaud this new online lending industry because it is bringing capital to people who need it badly. But there are abuses,” says Sen. Steve Glazer. “This law offers a modest measure of disclosure to help level the playing field for small business owners. It will make California a leader in placing the interests of small business owners on par with the big players in the financial industry.”
This legislation is not only a win for small business owners looking to secure funding, it’s also a win for online lenders who had already adopted responsible lending practices and transparency as they no longer have to compete with competitors who disguise their costs.
The bill requires all online lenders to disclose the following when they offer financing of less than $500,000 to a business owner:
- Total amount of financing
- Total cost of financing
- Term length
- Frequency and amount of payments
- Prepayment policies
- Annualized rate
This level of transparency is a godsend to small business owners who have been demanding it since online lending hit the market. According to Small Business Majority, 80% of small-business owners polled are in favor of ensuring interest rates and fees are clearly disclosed to borrowers.
This new law guarantees this kind of disclosure and sets an example for legislators across America to take action to ensure small business owners don’t have any more hurdles than the ones they already face in their journey to build successful companies.