Loans can make an entrepreneur’s dreams come true, but they can just as easily destroy those dreams.
Leila Bardales found that out the hard way.
Leila and her husband, part of Small Business Majority’s network of entrepreneurs, own California Modern Woodworks in Los Angeles. They started that business with a considerable amount of their own savings. Over time, they found they didn’t have enough cash to keep up with their growing need for raw materials.
One day in 2016, Leila received a letter promising what seemed like easy capital. Her business needed cash, so she and her husband ultimately took out two loans through online lenders.
What they did not realize, however, was one of those loans carried an enormous 39 percent interest rate, and less than half of their monthly payments went to paying down the principal. This was likely a predatory loan, and it nearly destroyed Leila’s business.
“Most small business owners know high-interest loans are bad, but I didn’t know what I was getting into,” Leila said. “I’m worried more business owners like me will be victimized by bad loans unless something is done to stop some lenders from taking advantage of people.”
How could this happen? The federal Truth in Lending Act protects consumers but does not specifically protect small businesses. As a result, many small business lenders aren’t required to disclose all of their terms up front, making it far too easy to get trapped in a bad loan.
It does not have to be this way for small business owners. In fact, California can lead the way in ending high-interest lending practices that prey on small business owners.
The Legislature recently passed SB 1235 by Sen. Steve Glazer, an Orinda Democrat. The bill could end predatory lending by giving the California Department of Business Oversight the flexibility to set disclosure standards that give small business owners the transparency they deserve, without impinging on any responsible business practices.
These requirements would give small businesses the ability to compare products and make informed borrowing decisions while protecting them from unsafe or predatory lenders.
At the Small Business Majority, we have found that predatory lending, particularly by online lenders, is a concern for California small business owners. While online small business lending has opened up new sources of capital for small business owners, our members believe lenders should be regulated to ensure small business borrowers are protected from predatory practices. Online lenders should be required to clearly disclose interest rates and fees to borrowers.
Alternative lending products offer exciting new financing opportunities for small businesses but these products cannot exist in an unregulated space, leaving small business owners everywhere open to predatory practices that can cripple their business and undermine their financial security.
SB 1235 would extend important protections to small businesses. We urge Gov. Jerry Brown to sign this first-of-its-kind measure. It could serve as a model for other states that want to protect their small businesses from predatory lenders.
Mark Herbert of Concord is Small Business Majority’s California director, email@example.com. He wrote this commentary for CALmatters.