Illinois May Be the First State in the Nation to Regulate Predatory Small Business Lenders

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Merchant cash advance companies typically offer their loans or cash advances to businesses with poor credit with effective interest rates over 100%, shorter payback periods, and daily repayment requirements.

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“Access to capital is a priority for small businesses, but it has to be affordable and we need to ensure that businesses understand what programs are available to them and how to protect themselves as they grow.” – Chicago Mayor Rahm Emanuel (Getty Images)

With a strong push from Chicago’s Treasurer, Kurt Summers, the proposed Small Business Lending Act of 2016 (SB 2865) was passed out of the State of Illinois Senate Financial Institutions Committee on Wednesday. This state bill would be the first in the nation to regulate alternative, non-bank business lenders by creating new standards to protect small businesses and requiring more transparency in business loans.

Credit from commercial banks has been tight in the years following the recession, which led many business owners to turn to unregulated, non-bank lenders for their borrowing needs. However, some of these alternative lenders are using savvy marketing campaigns to lure businesses into taking out loans with unaffordable interest rates and hidden fees.

Treasurer Summers took action after hearing about this problem from numerous Chicago small business owners. Summers worked with Senator Jacqueline Y. Collins (D-16th) and Senator Karen McConnaughay (R-33rd) to draft the legislation.

“Today in Illinois, a small business can take out a $240,000 cash advance without providing any evidence of an ability to repay,” said Summers in his testimony in support of the bill. “While the industry will argue that the market will police itself – and that lenders making bad loans will eventually go out of business – this has not been the case historically. One need look no further than the payday lending industry and the mortgage lending industry.”

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Chicago Treasurer Kurt Summers speaking about the Small Business Lending Act of 2016 at the Illinois State Capitol.

The Small Business Lending Act of 2016 will need to go pass through both branches of the Illinois legislature and signed by Governor Bruce Rauner before becoming state law. The provisions of the Small Business Lending Act will:

  • Create standards to protect small business owners from economic distress by requiring non-bank lenders to determine the borrower’s ability to repay the loan or advance
  • Require non-bank lenders to clearly disclose the annual percentage rate (APR) of a loan, inclusive of fees, and the total amount of money the borrower must repay
  • Limit late fees, prepayment fees, and prohibit “double-dipping,” which occurs when a non-bank lender adds fees or charges on existing principal during refinancing

Once again, the city of Chicago is one of the first cities in the nation to take action against predatory small business lenders. In 2015, Mayor Rahm Emanuel launched an awareness campaign to educate the business community about predatory merchant cash advance companies and promote access to credible local lenders, like Accion Chicago. The city posted campaign collateral on buses and trains and also shared information in workshops, email correspondence to business owners, as well as in the Small Business Center, the city’s one-stop-shop for small businesses.

Local leaders can take action against predatory small business lending by surveying business owners on their credit usage and understanding the financing climate, talking to business owners proactively about their borrowing needs and providing access to trustworthy lenders, and informing business owners about their rights (the Small Business Borrowers’ Bill of Rights is a useful guide).

About the Author: Emily Robbins is Principal Associate for Economic Development at NLC. Follow Emily on Twitter @robbins617.