Business organizations and stakeholders call on Congress to help protect small business borrowers

Dear policymaker,

As representatives of organizations that support small business owners and aspiring entrepreneurs, we know firsthand how critical access to capital is to maintaining business operations and growth. That’s precisely why all small businesses should be protected as they search for capital.

Currently the federal Truth in Lending Act (TILA) only requires that consumer creditors disclose critical financing information, including annual percentage rate (APR), in a clear and comparable format. However, Congress has not taken the critical step to extend these disclosure requirements to small business loans and other credit products, which means small businesses, particularly owners of color, are vulnerable to irresponsible lenders. In fact, minority small businesses are twice as likely to apply for high-cost and opaque credit products. What’s more, small businesses have reported such opaque terms they unknowingly took financing products with APR rates as high as 350%. 

In order to adequately protect small businesses, TILA disclosures must be extended to small business financing products. This must include the following measures:

• Preventing alternative financing providers (e.g. merchant cash advances) from disclosing misleading “rates” that trap small businesses into debt cycles. This would allow small business borrowers to make informed financing decisions and close the regulatory gap that has exempted business financing from the Truth in Lending Act’s disclosure requirements since 1968.
• Require financing providers (e.g., merchant cash advances and factoring) that disproportionately target minority communities, particularly Black and Hispanic small businesses, to provide transparent APR disclosures up front. This would help reduce credit access disparities. 
• Establish estimated APR calculation methods for cash advance and factoring products in statute, which are necessary for future commercial financing regulation (for example, Section 1071 of the Dodd-Frank Act requires that lenders collect APR and other information from commercial borrowers).

We urge you to help protect small businesses by supporting legislation like the Small Business Financing Disclosure Act this year, which would extend TILA disclosures to small business loan products.