Online finance providers have supplied an innovative source of capital for small businesses after a credit gap opened up in the wake of the Great Recession. However, while disclosures such as annual percentage rate (APR) are required by federal law for consumer loans, they are not for small business loans and credit products. The result has been costly for small business owners, with some providers charging exorbitant but undisclosed rates. Research by Opportunity Fund found the average monthly payment for some small businesses was about double what they could afford to pay.
New Jersey has an opportunity to be a leader in extending commonsense consumer protections to the small business credit market. Proposed legislation currently being debated calls for standardized terms such as APR, the payment schedule, and the minimum payment to be applied to small business loans or credit products up to $100,000.
Access to financing is often one of the biggest hurdles small business owners face, particularly for the smaller loan amounts many new or very small businesses seek: 86 percent of minority-owned businesses and 88 percent of woman-owned business bring in less than $100,000 per year.[i] Supporting the financial health of these businesses is often critical to supporting the financial health of the communities they serve as well.
That’s why the Progressive Policy Institute (PPI) commends State Senator Troy Singleton and Representative Clinton Calabrese for introducing this important legislation requiring greater transparency in the small business lending market. California was recently the first state in the nation to enact a similar law. The New Jersey bill closely tracks a proposal detailed in a recent PPI policy report, “Shining a Light on Small Business Credit: Promoting a Transparent Marketplace” by Jessica Milano, the former Deputy Assistant Secretary for Small Business, Community Development, and Housing Policy at the Treasury Department under the Obama Administration.
Milano calls for legislation to extend the Truth in Lending Act disclosure requirements to small business loans or credit products under $100,000. While no one likes reading fine print and filling out loan documentation, a recent poll by Small Business Majority found that 74 percent of small business owners support regulating online lending to ensure small businesses are protected from predatory practices. Simple disclosures including a few key metrics—especially APR—would allow a small business owner to “comparison shop” and easily analyze loan prices and terms across multiple credit providers, whether they are a bank, a payment processor, or an online lender.
According to the research by Opportunity Fund, some online lenders charge businesses average APRs of 94 percent, without ever disclosing those rates to the borrower. These companies argue that disclosing APR will discourage customers from taking their loans, causing the small business credit gap to widen further. That’s like arguing that if your doctor told you smoking was dangerous you might not do it, which in turn would hurt tobacco companies, so better not to know. If your doctor kept information that was vital to your health from you, he could be accused of malpractice, so why doesn’t the same principle apply to financial health as well?
As Singleton and Calabrese recognize, disclosing APR at the time of offering and acceptance of a loan would equip small business owners with a transparent metric to make an apples-to-apples comparison between products and choose the best option for them.
[i] Kate Bahn, Regina Willensky Benjamin, and Annie McGrew, “A Progressive Agenda for Inclusive and Diverse Entrepreneurship,” Center for American Progress, October 2016. https://cdn.americanprogress.org/wp-content/uploads/2016/10/13000159/ProgressiveAgenda.pdf