Ithaca small businesses deserve truth in lending

ITHICA JOURNAL

Eric Levine November 21, 2020

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As COVID-19 cases continue to rise and fall in and around Ithaca, small businesses are wondering what the future holds.

If they were lucky enough to qualify for Payroll Protection Plan funds, they’ve long since run out. Many are now considering loans to tide them over until the better times we all hope are ahead.

Unfortunately, predatory lenders are ramping up their efforts to take advantage of small businesses hit hard by the pandemic.

Today, state law does not require all financing companies to clearly disclose pricing and terms to small business borrowers. Fortunately, in July, the state legislature passed the Small Business Truth in Lending Act, requiring clear and comprehensive disclosures from all lenders. It awaits Governor Cuomo’s signature.

This bill goes a long way toward addressing the issues of the deceptive Merchant Cash Advance (MCA) industry and other online lenders. Unfortunately, many small businesses, desperate to stay afloat during the pandemic, have turned to merchant cash advances. These 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 unaffordable debt unknowingly, when they might have used a credit card or other lower-cost financing option.

Community Development Financial Institutions (CDFIs) like Alternatives Federal Credit Union (AFCU) can often help businesses get out from under crushing MCA debt. We know how harmful these products and other high-cost financing can be for small businesses, particularly during a crisis. Small businesses deserve straightforward disclosures so that they can make informed decisions and avoid debt traps.

Here in Ithaca, a woman business owner who identifies as a person of color needed cash to secure additional equipment and working capital to keep up with growing demand for her catering services. She borrowed $40,000 from an MCA company, secured by future anticipated income.

Unfortunately, the daily repayment withdrawals from her credit card sales were not clearly disclosed in advance and were much higher than she anticipated. The strain on her company’s cash flow led to late fees, penalty interest and overdraft fees, in addition to the original loan amount.

AFCU was able to roll the outstanding MCA loan into a larger commercial mortgage refinance that also eliminated a looming balloon payment from a third lender. We helped her establish a tax and insurance escrow account with her regular monthly mortgage payment, clearing up past-due tax bills and eliminating additional penalties and interest going forward.

This affordable loan with escrow allowed her to keep her business going, support more than forty minority employees and serve the needs of the community.

The Small Business Truth in Lending Act was endorsed by a wide range of lenders and small business advocates, including the New York State CDFI Coalition. Fair and honest lenders have nothing to fear regarding transparency and the adoption of standard terms to describe the cost of loans. That’s why we’re urging Governor Cuomo to help protect the small businesses in our state by swiftly signing the Small Business Truth in Lending Act into law.

Eric Levine, of Ithaca, is the chief executive officer of Alternatives Federal Credit Union.