Here in Rochester, small businesses are doing all they can to stay afloat during the pandemic, changing their product offerings and taking out loans. Unfortunately, too many small businesses are still in the dark on the true cost of predatory lending.
The federal Truth in Lending Act (TILA) requires standardized disclosures for consumer lending, including the annual percentage rate (APR) and repayment terms, but it doesn’t apply to financing for business purposes. The NYS Small Business Truth in Lending Act, passed in July, would bring common-sense transparency to small business financing at a time when it’s needed most.
Community Development Financial Institutions (CDFIs) like Pathstone Enterprise Center, Inc. can often help businesses get out from under crushing debt. But sometimes, even refinancing doesn’t get them off the hook for paying the interest and fees for the full term of the loan.
We recently received a loan request from a small coffee shop that wanted to refinance a $25,000 loan that they had taken from an online lender. The term of the loan was 12 months at an 11% simple interest rate, or a 21% actual APR. What they did not understand was that the loan included daily compounding interest and that payments would be automatically debited from their checking account - every day. Any day they didn’t have enough money in their account, they were charged a penalty which was added to the principal of the loan.
In the best of times, you have to sell a lot of coffee to pay rent, salaries, and cover a $75-a-day debt repayment.
During the pandemic, the days they didn’t cover that nut quickly added up. Pathstone was unable to help them, because the note was written with prepayment penalties which were not clearly disclosed. The owner had to close the business, leaving an empty storefront and out-of-work employees.
The New York State Small Business Truth in Lending Act, supported by a wide range of lenders and small business advocates including the New York State CDFI Coalition and NYS Senators Robach and Ranzenhofer, is a step in the right direction during these especially uncertain times.
CDFIs know too well how harmful predatory lending can be for small businesses, particularly during a crisis. That’s why we hope Governor Cuomo will swiftly sign the NYS Small Business Truth in Lending Act. Now more than ever, New York businesses should be able to trust all lenders to clearly disclose their terms, so borrowers can compare loans on an ‘apples-to-apples’ basis.
Hubert VanTol is the President of PathStone Enterprise Center in Rochester and Vice Chair of the NYS CDFI Coalition.