By Carolynn Welch
In Buffalo and across New York State, small businesses are not only exposed to risks posed by Covid-19, but also to deception and harm from predatory lenders.
Currently, state law does not require all financing companies to clearly disclose pricing and terms to small business borrowers. Fortunately, in July, the New York State Legislature passed the Small Business Truth in Lending Act, requiring clear and comprehensive disclosures from all lenders.
The bill goes a long way to address the issue of the deceptive Merchant Cash Advance industry. Unfortunately, many small businesses, desperate to stay afloat during the pandemic, have turned to merchant cash advances, in which they receive a lump sum of money up front in exchange for a much larger amount repaid through daily automatic deductions from their credit and debit card transactions.
While these advances are marketed as offering flexible repayment terms, the Federal Trade Commission recently sued an MCA that withdrew larger amounts from customers’ accounts than were authorized and continued to withdraw payments after advances had been fully repaid. Several businesses racked up overdraft fees from their banks because of these unauthorized and unexpected withdrawals – adding insult to injury.
The MCA industry is growing, and unfortunately, their cash advances are a lot like now-illegal payday loans for consumers. MCAs are not required to disclose annual percentage rates to borrowers, leading small businesses to take on unaffordable debt unknowingly, when they might have used a credit card or other lower-cost financing option.
Community Development Financial Institutions like Westminster Economic Development Initiative often help businesses get out from under crushing MCA debt. We know too well how harmful these products and other high-cost financing can be for small businesses, particularly during a crisis. Small businesses deserve straightforward disclosures from all financing providers so that they can make informed decisions and avoid debt traps.
The New York State Small Business Truth in Lending Act, supported by a wide range of lenders and small business advocates, is a crucial next step in protecting businesses from additional harm during these especially uncertain times
Gov. Andrew M. Cuomo has served as a national leader on Covid-19 response. He can now shield struggling small businesses from additional financial hardship by signing this legislation into law. Small businesses are depending on Cuomo’s leadership to protect them from deceptive lending.
Carolynn Welch is executive director, Westminster Economic Development Initiative, Buffalo.
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