News release
Assemblywoman Pilar Schiavo, D-Chatsworth, announced that her Protect Small Business from Predatory Lending Act (Assembly Bill 2116) has passed the California Legislature and has been sent to the governor’s desk. Similar legislation has been introduced at least three times in recent years, but previous efforts stalled before receiving final legislative approval.
“Small business owners deserve the same basic expectation that when they seek financing to keep their doors open, grow their business, or make payroll, they will not be trapped by predatory practices,” Schiavo said in a news release. “Small businesses are the heart of our communities. They create jobs, support families, donate to local causes, and make our neighborhoods places people want to call home. After multiple attempts to get these protections across the finish line, we have gotten further than ever before.”
When small business owners are looking for financing, they sometimes turn to options other than traditional bank loans to keep their businesses running or help them grow. But these financial products can come with far fewer protections and extremely high costs, the release said.
One analysis cited by the federal Consumer Financial Protection Bureau found that they can carry an average annual interest rate of 94%, with one reaching as high as 358%, the release said. And other recent reporting has found effective interest rates as high as 2,900%.
For small business owners, those numbers can mean the difference between successfully expanding and losing everything they have built.
Earlier this year, Schiavo sat down with small business owners and financing experts to discuss the real-world impact of these practices. Among them was child care provider Paloma Carona, who described turning to a merchant cash advance to help expand her preschool to a second location. She believed she was agreeing to financing at a 13% rate. The equivalent APR was actually approximately 235%, putting enormous pressure on the preschool’s cash flow and nearly forcing the business to close, the release said.
“Paloma’s story is exactly why this bill matters,” Schiavo said in thre release. “She was trying to do what we want every small business owner to be able to do: grow, create jobs, and serve more families. Instead, financing that should have helped her nearly destroyed the business she had worked so hard to build. We cannot allow bad actors to hide behind complicated products and fine print while small businesses pay the price.”
“We’re pleased that this chamber-supported legislation has passed the Senate and will make it to the governor’s desk. Small businesses need access to capital they can trust, with clear terms and a level playing field. AB 2116 brings greater transparency and accountability to commercial financing while helping protect business owners from abusive practices that can put their companies and livelihoods at risk,” Ivan Volschenk, president/CEO of the Santa Clarita Valley Chamber of Commerce, said in the release. “We appreciate Assemblywoman Schiavo’s leadership on this important issue for our small businesses and encourage Governor Newsom to sign AB 2116 into law.”
According to the release, the Protect Small Business from Predatory Lending Act will strengthen protections for small businesses by:
• Bringing covered commercial financing providers and brokers under state licensing and oversight.
• Giving state regulators greater ability to identify and address bad actors.
• Establishing clear standards for businesses offering commercial financing to small businesses.
• Prohibiting abusive practices that can allow financing companies to seize control of a business owner’s finances before a default.
• Creating a more level playing field for responsible financing companies that already follow fair lending practices.
The governor has until Sept. 30 to sign the legislation.
