A few weeks back, I testified on behalf of a bill that is making its slow, tortuous way through the California statehouse as I write. The bill would require more transparency from small business lenders regarding the costs of their products.
I'm not a big fan of regulation for regulation's sake. I think it can be all too easy for legislators (wittingly or otherwise) to overstep their bounds and impose strangleholds when what's needed is more room to breathe.
As an advocate for small business owners, however, I simply had to get behind something I truly believe is an important step towards helping small business owners more easily compare sources of capital, improve their credit, and ultimately change millions of lives for the better.
The problem California SB-1235 is trying to solve is simple--getting a business loan is hard. It's harder than it should be, at least. A study conducted by my company revealed that one in four small business owners who are rejected for a loan have no idea why they've been denied.
This isn't to say that there aren't good lenders or financing options in the space. Here are four basic ways to recognize a lender you can trust:
1. You're not being pressured.
If your lender is pressuring you to close today, or even in the next couple of days, that should ring some alarm bells. It doesn't necessarily mean they're acting in bad faith, but you should view it as a red flag.
Ideally, your lender will acknowledge that you're making a big decision and encourage you to put some thought into it. Within reason, of course--you shouldn't expect them to hold your hand through the whole process--but that reasonableness should go both ways.
2. You don't need a lawyer and accountant to understand your terms.
If you're looking at a document that's so convoluted you're uncertain 1) how much you're forking out for the loan and 2) when you're expected to pay it, you may want to rethink your strategy.
A good rule of thumb here is to assess how much fine print you're looking at. Two pages of readable font followed by a ream of microscopic addenda is fishy, to say the least.
You want the paperwork to be straightforward and readable. When the future of your business and thus your livelihood is on the line, that doesn't seem like too much to ask.
3. Your rights as a borrower are clear.
Your lender should make your rights as a borrower plain as day. These rights include understanding the total amount of the loan, the current interest rate and a precise explanation of default and its consequences.
In the end, it all comes down to transparency. It's like potable drinking water versus the kind that gives you giardia--clear = good, murky = bad. Check out the Small Business Borrowers' Bill of Rights, of which my company Nav is a signatory, for an orderly presentation of what you're owed.
4. Your lender isn't making last-minute changes.
If everything about the transaction is as smooth as butter right up till the moment you're ready to sign on the dotted line, and your lender decides that that's the perfect time to renegotiate the deal, it's probably the perfect time for you to walk away instead.
Your lender not honoring what you agreed upon at the outset could hint at more dishonorable behavior to come. When borrowing large sums of money, there shouldn't be any surprises.
Update: About an hour and a half after I finished submitting this article for publication, my business partner, Caton Hanson, announced the following to our team:
"Just finished giving a statement in support of the CA senate bill to help SMBs understand loan terms. Same bill Levi testified in support of a few weeks back. The bill passed the assembly committee meeting today 9-0 with two abstaining. Senator Glazer, the sponsor of the bill, had our support along with a few other SMB supporters. The opposition was well-prepared and argued staunchly against it. Was great to see both CA Democrats and Republicans support the measure. I love what we're doing to help SMBs."
Amen to that.