Commercial Business Lenders

During the last few day of its 2018 meeting, the Californian legislative sent a flood of draft laws to Governor Jerry Brown's desktop on issues as varied as grid neutral, early-stage schools and cleaner power. However, it is SB 1235, "Commercial finance; disclosures", which may be of particular importance to commercial lenders.

This bill is intended to give small California companies more information with which they can benchmark and analyse funding opportunities, even with regard to offerings via on-line credit portals such as Kabbage and OnDeck. Unless it is ratified (or Governor Brown vetoes it by September 30), California will be the first state in the country to demand disclosure to small business that is similar to disclosure to tell the true story in granting credit for retail operations.

The Federal Reserve Board (Board) published a survey this summers on the raising of small business owner debt from on-line lenders. However, according to the survey, the total amount of on-line credits to small companies last year was only about 12 billion dollars. However, one in four small business loan seekers were seeking funding from an on-line financier last year, and the Board expected that on-line retail bonds for small business will further expand, particularly in the small business loan book (below $100,000).

It found that small businesses are often puzzled by finance provided by on-line credit markets, that such finance generates lower levels of customer interest than finance provided directly by conventional banks, and that both lenders and borrower could profit from enhanced disclosure of offerings presented on on-line markets.

Under the Bill, "providers" of "commercial financing" of USD 500,000 or less are required to disclose to the beneficiaries of the funding offer: the aggregate amount of funding provided; the aggregate costs of the funding; the maturity or estimate of the maturity; the methodology, incidence and amount of payment; and (until January 1, 2024) the aggregate costs of the funding, measured as an average percentage.

Because of the possible difficulties in making these statements when the funding involves either factory finance or asset-based credit, the statements in these cases can be made using an example (e.g. per 10,000 dollars funded). Legislation has not established the methodology for expressing annualised course publicity, but has delegated this role (as well as details of definition, content and calculation methodology for each of the other disclosures) to the California Commissioner of Business Oversight.

It may not be an easy job - the draft bill's legislation story shows that both the APR and the'estimated total costs of capital' were regarded as a methodology, the first being criticised by credit groups that oppose the calculation because it resulted in different computations for different products, and the second being criticised as non-tested metrics.

The Commissioner has no time limit to lay down provisions on publicity, and suppliers are not obliged to fulfil the obligations until such provisions have been laid down. Should the draft legislation enter into force, both small business lenders and small business lawyers should monitor the rule-making processes carefully in order to have a vote in which the Commission and the other executive bodies determine the method of disclosing information.