Small Business Majority Applauds Introduction of Legislation that would Halt Predatory Financing to Small Businesses

Washington, D.C. - Small Business Majority applauds the introduction of the “Small Business Financing Disclosure Act of 2023,” which would amend the federal Truth in Lending Act (TILA) to extend the same protections for consumers to America’s small businesses. 

This bill, introduced by Senator Robert Menendez and Congresswoman Nydia Velázquez and cosponsored by Senators Sherrod Brown, Ben Cardin, Ron Wyden, and Congresswoman Maxine Waters, will support a high level of transparency on finance products that is necessary for small business growth.

A majority of small businesses in the U.S. are sole proprietors, not corporations, and manage their finances on their own. Many don’t have the time and resources to devote to full-time bookkeepers and accountants who can comb through detailed loan applications. This leaves them susceptible to predatory lending practices that may include unknowingly agreeing to higher-cost loan terms and annual percentage rates (APR) as high as 358% because lenders can legally offer opaque terms through deceptive practices.  

“In order to feel a sense of prosperity for the future, small business owners often rely on members of Congress to create and support policies that will level the playing field for small business owners with limited resources,” said Celeste Vaughn, co-owner, Hottrok, LLC in Newport News, Va. “I’ve heard policymakers tout their support for small business and note our community as the backbone of the economy. But during the pandemic, I believed that the lending system broke and efforts to fix it were in vain. Small businesses keep money in communities but it’s difficult for them to succeed if they’re putting all their energy into combating fraud and working to pay off high-interest loans. I’m excited for the opportunity to expand my business through a transparent loan process and not feel trapped by possible predatory lending.”

Few protections are provided to small business owners seeking financing because the federal TILA does not apply to most commercial financing. Currently, TILA requires that consumer creditors disclose critical financing information, including APR, in a clear and comparable format; however, no such standard exists to protect millions of small business owners. The Small Business Financing Disclosure Act of 2023 would ensure necessary safeguards and bolster the role of the Consumer Financial Protection Bureau (CFPB) in policing small business lending and bringing enhanced transparency to small commercial loans. 

“Access to ongoing capital is necessary for any small business to thrive. However, small businesses like mine have faced significant barriers in accessing capital, especially when we try to grow,” said Michelle Boss, founder, Livermore Valley Wine Country in Livermore, Calif. “I’ve been a victim of fraudulent lending institutions that took advantage of my yearn to become a successful entrepreneur. While trying to expand my business, I soon realized that commercial lending for small business owners lacked the regulatory oversight as with personal lending. I’m hopeful that enacting legislation like expanded TILA will ensure small businesses can thrive. I believe this bill will help rebuild the confidence of small business owners who have hesitated to broker financial relationships due to prior predatory practices.”

“Unregulated, predatory lenders come with the promise of fast cash for small businesses; however, these lenders often use bait and switch tactics that can send a business into financial ruin,” said John Arensmeyer, Founder & CEO of Small Business Majority. “For years predatory lenders have been able to skirt transparency and trick small business owners into repaying a loan at exorbitant rates. As small businesses recover from myriad challenges stemming from the pandemic, we cannot allow them to be taken advantage of any longer. We commend Senator Menendez and Congresswoman Velázquez for leading this charge in Congress and urge all Members to join them in providing America’s entrepreneurs with the financial transparency they rightly deserve.” 

Forty small business organizations have signed a letter urging Congress to swiftly pass legislation protecting small business borrowers. Click here to read the letter. 

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