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Small Businesses' Access to Capital Under Attack in California

The opinions expressed by columnists are their own and do not necessarily represent the views of

The U.S. economy is booming thanks to the expansion of small businesses, yet some states are on the verge of actually reducing small business access to capital.  Despite what might be good intentions, these efforts will restrict access to capital for small businesses and will hurt the very people liberal legislators are trying to protect. The unfortunate outcome of even well-intentioned regulatory excess is the government limiting choice and causing some small businesses to go bankrupt.   

Limiting access to capital would be ill advised during this time of economic expansion.

The boom is undeniable. The Small Business Administration (SBA) gathers data on the growth of small businesses and they calculate that small businesses employ 58.9 million people or 47.5% of the private workforce. Bloomberg reported on August 23, 2018 that “U.S. filings for unemployment benefits fell for a third week and remain near the lowest in almost five decades, indicating a tight job market, Labor Department figures showed.” CNBC reported on July 27, 2018 that second-quarter Gross Domestic Product (GDP) jumped by 4.1% for the best pace in four years.  Thanks to President Donald J. Trump’s deregulation, tax cuts and pro-America first policies, the economy is doing great.  Yet, some liberals are trying to sabotage the recovery.

Liberals in California are a case study in good intentions gone wrong. The Consumer Finance Coalition (CFC) wrote a letter on June 15, 2018 opposing state legislation that, according to Bloomberg News, “would require nonbank small-business lenders to estimate the ‘annualized cost of capital’ (ACC) to disclose financing costs.” The CFC argues that the ACC is an “untested metric that fails to recognize the difference between a loan, which is absolutely repayable, and an accounts receivable purchase transaction. Because this disclosure is not consistently used in any business finance transactions, it will confuse small business owners and increase the risk of litigation.”  Translated into English, these new requirements will limit choice for those who want alternatives to typical term loans and will hurt many medium and small businesses in the state. 

Receivables purchase agreements, also known as merchant cash advance, provide alternatives to those who often cannot or choose not to secure a traditional loan. The CFC is a coalition of companies “who provide needed capital to small and medium sized businesses through innovative, non-traditional methods and this bill will cripple our abilities to assist those business in need.” When a small business chooses not to go to a large bank or the SBA for a loan, they have the alternative of signing a receivable purchase agreement to receive a cash advance on future account receivables.   These are alternatives to loans provided by high tech companies who can provide capital for an agreement by the receiving company.  

Groups like the Consumer Finance Coalition are trying to set up standards for the industry.  Much like the American Bar Association polices the law profession, this group plans industry standards and best practices to set up something similar to a self-regulating organization – or SRO.  These types of coalitions provide an expertise in how an industry or trade works far better than politicians.

The tech driven receivables purchase agreement method of securing capital for small businesses is similar to the cryptocurrency business model in terms of time on the playing field of business and reliance on cutting edge technology.  Cameron and Tyler Winkelvoss have created something called the Virtual Commodity Association (VCA) as a means to set business wide standards and to avoid harmful government regulations over the exchange and use of digital currencies.  Groups like the VCA and the Consumer Finance Coalition are paving the way for smart self-regulation to avoid heavy handed and misguided government regulation.   Government is in danger of harming nascent industries – state-by-state - with regulations that make no sense and imposes extra unnecessary costs of doing business in that state.

In 2017, the Chamber of Commerce put out a study of how federal and state regulations harm small business. They found that “beyond the federal level, small businesses have to deal with a maze of red tape from state and local governments to start a business, apply for a business or occupational license, hire employees, pay taxes, enforce contracts, and even close a business. Regulatory complexity is death by a thousand cuts to America’s small businesses.

This problem is compounded by the estimated 90,106 state and local governments in the United States (as of 2012), each with their own varied authority to promulgate rules and regulations. Their rules and complexity continue to harm to America’s small business.” While the federal government has proven to be a problem, the states are killing small businesses with a patchwork of regulatory burdens. 

The federal, state and local governments would be smart to respect that industry to police bad actors in their space.  That is a far better alternative to regulatory idea, like the California legislation, that does more harm than good.

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