When it comes to lending, many of the practical consumer protections that apply to consumers, such as annual percentage rate disclosure, do not require small business lending. And, being in an underserved credit market, many often unwittingly pay much higher interest rates.
During the pandemic, many companies take out Paycheck Protection Program (PPP) loans at 0%, and Small Business Association (SBA) loans are offered under 10%. But look beyond that and you will often find products that charge 50%, 80% or even 300% or 400%.
„These rates are not disclosed to small business owners,“ Louis Caditz-Peck, director of public order at LendingClub, told PYMNTS. „In our experience, it is not uncommon for small businesses to choose between different types of products, never knowing that one financing option will charge them a three-digit price and not being able to compare other, lower-cost options.“
Extending protection to small businesses
This is one of the reasons LendingClub supports bills that would create the Small Business Lending Disclosure Act of 2021, versions of which were unveiled in the House and Senate on November 19.
„This bill would extend that protection to small businesses too, so they could be transparent about the price they pay for credit – and better able to make an informed decision about which option is right for them,“ said Caditz-Peck.
This would be especially helpful for mom and pop stores that don’t have a CFO or internal legal counsel to go through the fine print. They need funding – and they need transparent disclosure of that funding.
Fight in an underserved market
Small business loan products are expensive for several reasons, similar to Caditz-Peck. Bank lending that died out during the Great Recession never came back, and the number of community banks – traditionally an important part of the small business lending system – has declined.
„Sometimes that niche is filled by companies that don’t have very good products – they just might have huge fees and they could be difficult to sell,“ he said.
That created the need for legislation. Lending protection laws, similar to those that Congress is currently considering, were passed in California in 2018 and New York earlier this year. In both states they were passed by an overwhelming bipartisan majority.
Ensuring price disclosure
„I think lawmakers have realized that the truth in lending is pretty modest market intervention,“ said Caditz-Peck. “It is basically the basis for a free and fair market. It is not really a government intervention, but a price disclosure opportunity that is required for free and fair markets to function. “
He pointed this out.
The draft law will be supported by the chairmen of all relevant committees in both houses as well as by small business groups, civil rights groups and FinTech groups, said Caditz-Peck. LendingClub is ready to work with anyone who supports the law to get it passed.
„I think this is just a simple, sensible way to help small businesses and innovate in the financial market,“ he said.