Transparency in lending practices protects small businesses

Consumers are protected against predatory lending in Illinois. Small businesses are not.

In fact, nonbank lenders aren’t even required to disclose the true cost of financing to small businesses.

Merchant cash advance companies and other out-of-state lenders are able to hide certain fees, causing some small businesses to pay excessive effective interest rates, some reaching triple digits. This can cause small businesses tremendous and unnecessary financial hardship, threatening their viability and impeding their ability to grow.

Solicitations from these companies fill the inboxes of many small businesses. Their products may seem like viable paths to navigate difficult financial situations or scale operations. In some circumstances, these funds can help small businesses navigate unforeseen financial difficulties. However, when they lack transparency and conceal the true cost of the loan, small businesses can be ruined.

The lack of consistent APR disclosures also impacts a small-business owner’s ability to compare financing options and make the best choice.

According to the Responsible Business Lending Coalition, about $459 million is lost each year by Illinois small businesses because nonbank lenders charge excessively high effective interest rates without proper disclosures. Specifically, they do not disclose the Annual Percentage Rate (APR) or “all-in” cost of financing.

There is legislation in Springfield that will require nonbank lenders to provide small business borrowers with the APR for loans. Banks already are required to provide small businesses with the ARP for loans. Consumers must be provided the APR from lenders. There is absolutely no reason these same transparency requirements should not be afforded to the small businesses that are the backbone of our economy.

Isn’t transparency a good thing? Shouldn’t lenders want to see the businesses they lend money to succeed?

This bill does not prohibit lenders from charging extremely high interest rates to small businesses or piling costs and fees onto their products. They can send all the emails and materials they want to small businesses. This legislation requires APR disclosure so small businesses are provided the same transparency as other borrowers.

Regarding transparency, the Small Business Advocacy Council championed legislation providing the small business community an easier way to monitor and understand the impact of proposed new regulations. That bill was enacted into law.

The Regulatory Flexibility Program analyzes the way new regulations will impact small businesses so interested business owners and advocates can make their voices heard. This can be accessed through the Department of Commerce and Economic Opportunity’s website. The SBAC also will be highlighting some of the most pertinent proposed rules on its website.

Small businesses drive our economy, create jobs, and support local communities. An engaged small business community has the critical mass to have a big impact in Springfield and there are roughly two months left before this state legislative session concludes.

The SBAC will be heading to Springfield to advocate for a robust agenda, which includes legislation to make health insurance more affordable for small businesses and the Small Business Job Creation Tax Credit, which currently has 35 bipartisan cosponsors. Reach out to us if you would like more information about how to get engaged.

• Elliot Richardson is president and co-founder of the Small Business Advocacy Council.