As reported here recently, SB 1235 has been signed into law by Governor Brown. The legislature believes this new law will protect small business owners and empower more small businesses to succeed. Many of the bill’s supporters, including small business owners, believe the passing of this bill was critical not only to the economic health of California but to the entire nation as California becomes the first state to enact truth-in-lending laws that protect small business owners.
Small business lending is quickly evolving, primarily as a result of the internet giving small business lenders a means to find financing for their business enterprise in many novel ways and in many new places. Online there is a proliferation of lenders offering to provide easy to obtain next-day financing. Up to the passing of SB 1235, this type of lending was relatively unregulated.
Proponents of the bill, state that research, including that conducted by the U.S. Federal Reserve Bank, indicates that many business owners do not understand the true costs of business financing. They claim that many small business owners felt that lending predators often took advantage of their ignorance. With the explosion of available lenders on the internet, more opportunities arose for the unscrupulous to unfairly profit at the expense of small business owners.
While most lenders that deal with small business owners are honest and transparent, there are always those that rely on high-pressure sales tactics and marketing strategies that often muddy the true cost of their product. The legislature believes that SB 1235 will eliminate those practices that are unscrupulously confusing and compel those lenders who tend to act “on the fringe” to comply with basic disclosure requirements that ensure their honesty.
SB 1235 is seen by some as an opportunity for California to lead the country in providing small business owners with the same protections that consumers have enjoyed since the 1960s. Proponents believe that any assistance to California’s 3.8 million small businesses should theoretically have a material, positive impact on the state’s economy as many of the bill’s advocates believe the new legislation will accomplish the unthinkable: The chance to provide an impetus for business growth with virtually no fiscal effect on Californians.
Senate Bill 1235 requires that a lender will have to disclose certain facts at the time it offers financing of less than $500,000 to a business owner. These factual disclosures include the total amount of financing; the total cost of financing; the length of the loan term; the frequency and amount of payments; any pre-payment policies; and the annualized rate of interest. The law applies to traditional term loans, lines of credit, merchant cash advances, lease financing, factoring, and asset-based financing.
With these material disclosures, some small business owners feel that they can make better decisions that have less of a tendency to negatively affect their business in the future. They feel that all of SB 1235’s required disclosures are sufficient to enable them to intelligently shop for financing and obtain the best loan deal possible. To a small business owner, fewer bad loans means fewer chances for a small business to economically move backward rather than forward. Perhaps more importantly, fewer bad loans may mean a lower likelihood that the business will ultimately fail. How SB 1235 affects small business owners truly remains to be seen. Only time will tell.
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