• Will Tumulty, CEO at Rapid Finance


• 31.01.2024 02:45 pm
#fintech #lending #sme

Recently there has been a trend among U.S. states of enacting state-specific regulatory requirements for companies engaged in small business financing. These laws intend to standardize disclosures for small business commercial financing, enabling transparency of different financing products and their terms so that small business financing applicants can make informed decisions when applying for a loan or other forms of commercial financing.

Most recently (January 2024), new commercial financing disclosures for Florida and Georgia went into effect.  California, New York, Utah, and Virginia previously enacted commercial financing disclosures. While these laws are all similar in purpose, there are several key differences for each state.  Florida, Georgia, and Utah require a funder to disclose the total dollar cost of the financing while disclosure requirements in California and New York require an APR or estimated APR be disclosed. 

With more states continuing to pass their own small business financing statutes, keeping up with the compliance requirements across many different states is presenting a challenge for fintechs and other commercial and SMB lenders. This is a challenge that must be met as small businesses serve as the lifeblood of the U.S. economy, accounting for nearly 99.9% of all businesses in the nation. Despite the intent of these regulations to support and protect small businesses the differing regulations have led to some providers pulling back from certain markets and product offerings – something that Bloomberg Law reports is causing some SMBs to have fewer avenues for accessing vital working capital.

Some specific reasons that lenders have cited for this pullback include vague requirements, conflicting or unclear definitions, differing regulatory regimes, and stiff civil penalties. Because financing companies that fail to comply with new disclosure laws can face significant fines and other legal ramifications, this places a strain on those who are not equipped to adequately monitor and comply with different requirements from state to state.

The situation won’t be getting easier for fintechs and finance companies, as there is even more regulatory change on the horizon, with several other states already considering small business financing disclosure requirements of their own.

So, what strategies can fintech, commercial lenders, and SMB financing companies employ to ensure they remain compliant and not limit their opportunities for growth? One option is to invest in scaling up their own legal teams and compliance departments to help ensure that their lending operations remain compliant in each state in which they do business. Another option is to work with an established national lending-as-a-service provider to shoulder that burden and integrate the delivery of compliant disclosures into the lender’s existing systems and workflows -- ideally one that can support multiple products with different payment frequencies, fees, and rate structures. 

Within today’s business lending environment, the one constant seems to be change and that certainly applies to regulatory compliance. Whichever strategy lenders and finance companies choose, they must recognize that the burden of compliance rests on them. In an increasingly competitive marketplace, their ability to quickly adapt to regulatory changes and updates at the state level will play a key role in their ability (or lack of ability) to serve their small business customers on a national scale.