In 2022 California became the first state to enact a state-level commercial financing disclosure law that sought to establish safeguards for small businesses (SMBs) and enforce the disclosure of specific information. Other states like New York, Utah, and Virginia have enacted similar legislation seeking to standardize disclosures for small business commercial financing and enable transparency of different financing products and their terms.
Fast forward to 2023, Georgia and Florida implemented their own specific regulations on commercial financing disclosures, joining a growing list of U.S. states imposing their own state-specific requirements for small financing operations. Despite disclosure laws sharing a common goal, differentiating regulations from state-to-state can be a challenge for funders to comply with.
For instance, both Georgia and Florida do not require small business funders to register with the state, unlike Utah and Virginia. Additionally, Virginia, Georgia, Utah, and Florida all require funders to disclose the total dollar cost of the financing, while California and New York opt for the disclosure of an APR or estimated APR. These types of differences and variations can ultimately get in the way of small businesses receiving vital capital when they need it most.
Maintaining regulatory compliance is essential for funders
Small businesses are the lifeblood of the U.S. economy, comprising around 99.9% of businesses existing in the country and employ nearly 61.7 million Americans. The ability to provide small businesses with capital is integral for maintaining their current operations and fostering growth. However, differing regulations have caused funders to become apprehensive or pull back entirely from markets and product offerings. Some reasons include differing regulatory regimes, unclear definitions, and strict civil penalties. Whatever the reason may be, the result is small businesses ending up with fewer options to access working capital, which can severely diminish their ability maintain or grow their operations.
Failure to comply with new disclosure laws can be burdensome and expensive for financing companies who are not adequately prepared to shoulder the responsibility of compliance. Financing companies can face expensive fines and stiff legal ramifications which place a strain on financial institutions that lack the ability to monitor and comply with differing state requirements.
In New York, funders who violate the law can face penalties of $2,000 per violation, with fines reaching as much as $10,000 if a violation was intentional. With more states expected to implement disclosure requirements of their own, the funding landscape will only become more intricate. As a result, commercial financing companies involved in small business financing must be prepared to face the task of ensuring compliance across multiple states.
Strategies for funders to stay on top of commercial finance disclosures
To meet this challenge and avoid penalties, it is critical for fintechs, commercial funders and SMB financing companies to consider solutions that do not compromise their growth and maintain compliance. Fortunately, there are a variety of strategies and tools that can accomplish this objective.
Commercial financing companies might consider investing and developing their internal legal teams and compliance departments as a potential option. Externally, funders can choose to employ the services of Lending-as-a-Service providers that can integrate the delivery of compliant disclosures into a funder’s existing systems and processes without any friction. Third-party service providers can help maintain compliance with new disclosure laws. Funders should be established nationally and equipped to effectively support a variety of products with different fees, rate structures and payment frequencies.
Funders in both the commercial and business sectors should implement tools that enable them to produce commercial disclosure statements tailored to state-specific regulations. This can include implementing tools that can streamline required calculations and enable the creation of mandatory disclosures in formats that are printable or can be viewed online.
It’s mission critical for funders to recognize the potential friction that new compliance requirements may introduce, small business finance companies should proactively adopt the necessary tools and procedures to meet the financing needs of their clients efficiently and compliantly.
The implementation of regulatory compliance laws within several states are helping to empower small business financing applicants to make well-informed decisions during the loan application process or when considering alternative forms of commercial financing. As more regulatory changes begin to impact the market, lenders and finance companies must take the necessary steps to adapt to state-level regulatory shifts to serve their small business customers nationwide.
Will Tumulty serves as CEO of Rapid Finance, a financial technology company and the one of the largest providers of working capital to small businesses in the United States.