Needed: Protecting small businesses from predatory lending

“Small businesses are the backbone of the economy.” We hear this all the time from elected officials, but the data show it’s much more than a political platitude.

California’s four million small businesses employ 50% of the state’s private sector workforce, and accounted for two-thirds of job creation over the last seven years. They lifted us out of the Great Recession. But small business owners still grapple with acute challenges, particularly access to affordable credit.

Fortunately, AB 539, the Fair Access to Credit Act is on Gov. Newsom’s desk; this bill would protect small business owners.

AB 539 would cap interest rates on consumer loans of $2,500 to $10,000 at 36%

AB 539 caps off a legislative session during which lawmakers earned high marks for their leadership on small business issues. This year, the state Legislature passed 16 bills on key issues of concern to small businesses, most with bi-partisan support.

For the first time, CAMEO (California Association for Micro Enterprise Opportunity) has issued a scorecard ranking each member on how well they represented the concerns of small business owners during the 2019 session. The vast majority — 76% of Assembly members and 80% of state senators — earned top marks, a sign of the legislature’s commitment to strengthening the backbone of our state’s economy.

Among the bills that passed, AB 539 is one of the most important, capping interest rates on consumer loans of $2,500 to $10,000 at 36%. While AB 539 targets consumer financing products, many small enterprises mix business and personal finances. Small business owners often take out a personal loan for business purposes, don’t have fancy CFOs or legal counsel on staff, and many operate as solo business ventures or with a handful of employees. Because of this, they have about the same level of financial knowledge as the average American household.

Yet in California, they aren’t afforded the same level of protections as the average consumer.

That’s where AB 539 comes in.

Access to capital is commonly cited by small business owners as a major challenge. The financing options available to them are often unregulated and expensive. Small business owners that only need small amounts of capital to grow their business—for example, to purchase a used van to transport their goods to a local market­—often turn to payday loans.

Thirty-six states have rate caps of 36% and below including Texas (30%), Kentucky (24%), and Arkansas (17%).

According to state data, more than one-third of payday loan borrowers default on their payments. Not surprising, when the payday lending market is notorious for charging consumers unaffordable interest rates, sometimes in the triple digits.

California lawmakers restricted the interest rate for loans under $2,500 way back in 1985 — but they didn’t apply a cap to larger loans. In addition, last year, Gov. Newsom signed SB 1235 (Glazer), a bill championed by CAMEO that set the nation’s first truth-in-lending requirements for commercial lending. This bill provided historic transparency for small business borrowers in California and shines a light on predatory loan products. The bill currently on Gov. Newsom’s desk, AB 539, will ensure that the small business owners who are starting out will be protected from predatory practices.

Opponents of the bill argue that restricting the interest rate to 36% will mean that lenders can’t recoup their underwriting costs, and will simply stop providing credit to those who need it most. Thirty-six states have rate caps of 36% and below including Texas (30%), Kentucky (24%), and Arkansas (17%). Clearly, lenders exist and profit in these 36 states. Others may say that 36% is too high, but at least it is a step toward preventing the most egregious behavior.

By signing AB 539, Gov. Newsom has the opportunity to keep California at the forefront of protecting consumers and supporting small businesses. Combined with last year’s historic small business Truth-in-Lending law, AB 539 will further create a lending landscape that protects all Californians.

We owe it to the state’s hardworking, job-creating small businesses to stand up against payday lenders and sign this bill into law.
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Editor’s Note: Carolina Martinez is the CEO of California Association for Micro Enterprise Opportunity, a network of organizations dedicated to furthering small and micro business development in the state.