Among our most important responsibilities here at UCS is exposing and eliminating the myriad unfair practices of specific business lenders. Though the business financing industry has improved dramatically, many business lenders are still manipulating small business owners into perilous agreements. Their goal is not to help borrowers but profit off their inability to fulfill their obligations. One way business lenders do this is by forcing borrowers to sign what is known as a “confession/certificate of judgment” (COJ) before financing is distributed.
In this guide, we’ll answer the following questions and more:
- What is a Confession of Judgement (COJ)?
- Why is the Small Business Fairness Act Important?
- Are COJs Always Bad?
What is a Confession of Judgement (COJ)?
A COJ requires the borrower to waive numerous rights in court. Often, it gives the business lender permission to seize the borrower’s assets in the event of a default. Earlier this month, Senators Sherrod Brown and Marco Rubio introduced a bill that would protect small business owners from signing a COJ called the Small Business Fairness Act.
The Small Business Finance Association (SBFA) and United Capital Source are proud to announce their support for this bill.
Why is the Small Business Fairness Act Important?
Working with dozens of industries has taught us that misfortune is extremely common in the small business world. Even the most hard-working and intelligent business leaders can suddenly find themselves cash strapped. In many cases, cash flow issues can happen as a result of circumstances beyond the business leader’s control. But as dire as these situations can be, it doesn’t mean they cannot be resolved with civility and deference.
United Capital Source CEO Jared Weitz listed several measures. These measures can be taken before immediately resorting to attacking the borrower’s rights or seizing assets:
“Even if a merchant blocks payment, we have to go through a normal default and collections process before filing a COJ. This includes proper notifications to the merchant and working out a payment plan with them. When a merchant is legitimately having hardship but can still make payments, we need to work with them.”
Weitz, who was appointed Chairman of the SBFA Broker Council last May, then noted just how damaging a COJ can be if used maliciously:
“The impact that has on a business is tremendous. It put them back 5-7 years in both business and personal credit. It makes it even harder for them to grow their business which in turn employs others and so on.”
Are COJs Always Bad?
To be clear, the Small Business Fairness Act was not created to eradicate COJs. If used ethically and at the appropriate time, a COJ makes sense in some scenarios. As Weitz explained, COJs were initially designed to be incorporated into merchant settlement agreements. The problem, he said, is that lenders are using COJs as both an “underwriting tool and collections method”:
“This industry needs to be priced accordingly. This means the pricing and term of the deal should be in line with the risk of the file. A COJ shouldn’t be used upfront so much as in settlement. That’s my own opinion and the opinion of the staff here at UCS.”
More Accessibility, More Safety
Shortly after Weitz was appointed to his position as mentioned earlier with the SBFA, he announced that one of his top priorities would be developing new regulations for the ever-evolving business financing industry. Initiatives like the Small Business Fairness Act are mostly a response to the new business lenders that seem to be popping up every day. When the barriers for entry into this business are becoming smaller and smaller, it’s up to the seasoned veterans to make sure everyone is playing by the rules, especially in regards to the treatment of customers.
Business owners should, therefore, expect more bills and regulations similar to the Small Business Fairness Act to be drafted in the coming years. Increased accessibility to business financing can only achieve their desired result if business lenders prioritize the customer, not the need to draw a profit.