According to a poll conducted by the Secured Finance Network, since new California disclosure rules were implemented in December 2022, 40% of respondents were found to be “no longer lending” to prospective borrowers who fall within the regulations’ threshold of less than $500,000. The new regulations, which require sweeping financial disclosures, were introduced by State Senator Steven M. Glazer in 2018 and faced four years of strong opposition from the commercial finance community before being rolled out at the end of last year.
According to the poll, commercial finance companies would rather not lend to small businesses than comply with what they believe are “misguided and un-compliable” requirements.
“Unfortunately, we must now shy away from smaller deals (under the $500K threshold), as the disclosure requirements are extremely complicated to figure out and would require getting our attorneys and CPAs involved to ensure compliance,” Mark Hafner, president and CEO of Celtic Capital, which is based in Calabasas, CA, said. “It’s just not worth the costs involved to fund a small deal anymore. The statute is not user friendly and, frankly, not representative of the true costs, as there are numerous assumptions that have to be made to calculate the APR based on the state’s requirements. I honestly don’t think it was designed to meet the stated goal of the statute.”
“While the fines and penalties are clear under the regulations, the state has been unwilling to confirm our compliance or anyone else’s compliance.” Robert Meyers, president of Republic Business Credit, which does business with California-based businesses, said. “That fear is what has stopped 40% of our non-banks from doing business in the state, thus reducing access to capital for small- and medium-sized businesses. I expect this number to increase as time goes on. If the goal of this law was to better inform, it is actually doing the opposite, as APR just doesn’t apply to our products.”
The Secured Finance Network reported that its member companies provide “tens of billions” of capital annually in California to small businesses for essential working capital that funds inventory, work in process, payroll and more.
“Forty percent of billions is a large number,” Richard D. Gumbrecht, CEO of the Secured Finance Network, said. “In attempting to find a one-size-fits-all solution to financial transparency, the state has created a complex set of requirements that misrepresent the actual cost of borrowing. Lenders are saying it’s not worth the cost and risk of complying. If this sample of 50 lenders is indicative of what we can expect, clearly that was not the intent of the legislation. And considering the demise of Silicon Valley Bank, it’s more important than ever that capital is not restricted in California.”
The Secured Finance Network is working with state legislatures to revise the statute.
“Other states have found a simpler and more accurate way to protect small borrowers, and given the unintended consequences we are seeing, we are hopeful California will be receptive to these alternative approaches,” Gumbrecht said.
According to the U.S. Small Business Association, small businesses of 500 employees or fewer make up 99.9% of all U.S. businesses and 99.7% of firms with paid employees. Of the new jobs created between 1995 and 2020, small businesses accounted for 62% — 12.7 million compared to 7.9 million by large enterprises. In addition, a 2019 SBA report found that small businesses accounted for 44% of U.S. economic activity.
