Assemblywoman Pilar Schiavo announced Wednesday that her Protecting Small Businesses from Predatory Lending Act (AB 2116) has passed the California Legislature and is headed to the Governor’s desk.
Similar laws have been introduced at least three times in recent years, but previous efforts stalled before receiving final legislative approval.
“Small business owners deserve the same basic expectation that when they seek financing to keep their doors open, grow their business or make payroll, they will not get caught up in predatory practices,” said Assemblywoman Pilar Schiavo. “Small businesses are the heart of our communities. They create jobs, support families, donate to local causes, and make our neighborhoods places people want to call home. After multiple attempts to get these protections over the finish line, we’ve come further than ever.”
When small business owners seek financing, they sometimes turn to options other than traditional bank loans to keep their businesses running or help them grow. But these financial products may have far fewer protections and extremely high costs.
An analysis cited by the federal Consumer Financial Protection Bureau found that they can have an average annual interest rate of 94 percent, reaching as high as 358 percent. And other recent reports have found effective interest rates as high as 2,900%.
For small business owners, those numbers can mean the difference between successfully expanding or losing everything they’ve built.
Earlier this year, Assemblywoman Schiavo sat down with small business owners and financing experts to discuss the impact of these practices in the real world. Among them was child care provider Paloma Carona, who described turning to a cash advance from a merchant to help expand her preschool to a second location. She believed she was accepting financing at a rate of 13 percent.
The equivalent APR was actually about 235 percent, which put enormous pressure on the preschool’s cash flow and nearly forced the business to close. Watch Paloma share her story and Assemblywoman Schiavo’s full conversation with small business owners and financial experts. here.
“Paloma’s story is exactly why this bill is important,” said Assemblywoman Schiavo. “She was trying to do what we want all small business owners to be able to do: grow, create jobs and serve more families. Instead, the funding that should have helped her nearly destroyed the business she had worked so hard to build. We can’t let bad actors hide behind complicated products and fine print while small businesses pay the price.”
“We are pleased that this House-backed legislation has passed the Senate and reached the Governor’s desk. Small businesses need access to capital they can trust, with clear terms and equitable conditions. AB 2116 brings greater transparency and accountability to business financing while helping protect business owners from abusive practices that can put their businesses and livelihoods at risk,” said Ivan Volschenk, president and CEO of the Santa Clarita Valley Chamber of Commerce. “We appreciate Assemblywoman Schiavo’s leadership on this important issue for our small businesses and encourage Governor Newsom to sign AB 2116 into law.”
“We’ve seen an increase in cash advances to merchants promoting ‘quick financing solutions for tariff issues’ or other offers to help retailers deal with the ‘ongoing impact of global tariffs and international trade tensions’. This type of financing is predominantly predatory and routinely offers effective interest rates above 100 percent. That’s why California small business owners need AB 2116, which gives them stronger oversight and protections,” said Carolina Martínez, executive director of CAMEO Network, one of the bill’s sponsors. “We thank Assemblyman Schiavo for championing responsible small business lending and bringing AB 2116 to the Governor’s desk.”
The Protect Small Businesses from Predatory Lending Act will strengthen protections for small businesses by:
- Place covered commercial finance providers and brokers under state licensing and supervision.
- Give state regulators greater ability to identify and address bad actors.
- Establish clear standards for companies that offer commercial financing to small businesses.
- Prohibit abusive practices that could allow financial companies to take control of a business owner’s finances before a default.
- Create a more level playing field for responsible financial companies that already follow fair lending practices.
The Governor has until September 30 to sign the legislation.
Ed. Note: The above information was provided to KHST Radio by Schiavo’s office.
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