Predatory Lending is on the Rise – What Small Business Owners Need to Know

Since COVID-19’s outbreak, REDC has noticed an increase in clients who have fallen victim to predatory financing schemes that rely on misleading numbers and terminology to disguise extremely high rates of repayment. REDC has now analyzed several such cases and noticed many similarities. One critical tactic is not presenting the product as a “loan” at all. This allows them to avoid breaking laws prohibiting excessive interest rates, even though the agreements REDC reviewed had repayment amounts between 40-50% higher than the original financing amount – far higher than the maximum allowable interest in New York State.

The agreements do list percentages, but these, too, are misleading. Because it is not legally a loan, the agreement is structured as a “purchase” (for example, it may be titled a “Revenue Purchase Agreement”) where the financing company “buys” a percentage of the business’s future revenues, and this percentage is what is listed on the agreement. As a result, while the agreements REDC reviewed listed percentages ranging from 12-25%, the borrower’s true repayment rate was much higher. REDC urges all small businesses to use caution, read agreements carefully, and consult experts like REDC counselors when seeking financing: the fine print can make or break a business. Contact us; we are here to help.