In 1968, the Truth in Lending Act was established to protect Americans who chose to use consumer credit. The federal law called for creditors to disclose the full terms of the loans they were giving out to consumers to make sure they fully understood the loans and the cost of such loans. Over the past fifty years, the Truth-In-Lending Act has solely benefitted consumers. No similar law has applied to small businesses.
California just became the first state in the U.S. to extend Truth in Lending disclosures to small businesses.
To do this, California passed a bill that will require lenders extending credit to small businesses to provide them with the full terms of their financing offers prior to closing deals with them.
This bill was first introduced due, in part, to the emergence of many non-bank “on-line” or “marketplace” lenders that emerged after the financial crisis. Many regulators, advocacy groups, and trade groups supporting California’s small businesses were in favor of broader disclosures with regard to small business financing. Several studies and surveys revealed many California small business owners did not understand the terms, conditions, and costs associated with financing they were being offered or had obtained.
The new law calls for lenders to provide small business owners with a wide range of information and disclosures anytime they offer financing or credit less than $500,000. That information would include the total amount of financing, total cost of financing, the frequency and amount of payments, the financing term, any pre-payment policy, and the annualized rate of financing.
California’s new law is set to spring into action on January 1, 2019. It will cover small businesses wishing to take out traditional term loans, merchant cash advances, lines of credit, and more. Many expect other States to review and then adopt similar disclosure requirements to those imposed under California’s new law.
Portfolio Financial Servicing Co. is committed to providing all businesses with the financial services they need. Contact us today to learn more.