Predatory lending: A Montclair business owner’s cautionary tale
By DIEGO JESUS BARTESAGHI MENA
In 2019, Zina Floyd, owner of Café Moso, was opening a preschool near her restaurant in the South End Business District.
Floyd said she needed extra money in order to keep the preschool afloat. She said she didn’t have the extra capital to invest in her new business.
“You’re not an investor or a conglomerate,” Floyd, who is also the business district president, said. “The same [money] that you use to open up your business is the same money that you used to put your kids through college, to pay for your mortgage and your livelihood because you are still a mom-and-pop business. So, every dime counts.”
Floyd said several companies began calling her about loans. They’d promise she’d get $100,000 as soon as the next day, that the loans wouldn’t affect her credit report, that they’d be based strictly on the volume of sales of her business, she said.
Most of the time Floyd, would politely decline the calls. But the calls kept coming, sometimes daily.
“When I made the decision to do it, I was kind of put between a rock and a hard place and I said: ‘OK, let’s give this a try,’ because I needed a large amount of money quickly,” Floyd said. “They explained the terms, but it was kind of general, you know?”
Floyd said she’d prefer not to name the company she eventually used for a loan, or the broker who helped arrange it; Montclair Local could not verify the specific details of her situation independently of her own description. But at an event at her cafe in November, Sen. Robert Menendez (D-New Jersey) pointed to her story as one example of why he said new legislation would be needed to help protect small businesses from predatory lenders. He promoted a bill he co-wrote with Rep. Nydia M. Velázquez of New York, seeking to ensure small business owners have clear and accurate information about lenders before applying for loans.
Floyd, speaking to Montclair Local, said the company told her that for repayment, it would only take out funds from the money she had coming in daily. Floyd said she accepted the loan because, at the time, her business was making enough revenue to make the payments.
But eventually, she said, those payments became too much to manage.
She also said she was erroneously led to believe the debt would be moved to a U.S. Small Business Administration- backed loan, with flexible terms and low interest rates.
“So, we did these loans and my expectation was that it was only going to last for a couple of months. And then the person who helped me sign up for the loans disappeared,” Floyd said. “They’re essentially brokers for these predatorial small business loan companies.”
Floyd said once the loan company began asking for payment, the installments came too quickly, and with interest rates she couldn’t handle. She’d agreed to the terms, she said, but she hadn’t anticipated how overwhelming the payments would be. And when she reached out to renegotiate different terms, she said, the company stopped accepting her calls.
Floyd said it got to the point she wasn’t able to make ends meet.
“Big chunks of money were taken out on a daily basis. And our [preschool] program was monthly, so the money that we would receive at the beginning of the month had to last throughout the month to pay for the expenses of the business,” Floyd said. “It was just stripping me of our funds, with no ability to pay anything else.”
When she called the broker to discuss switching to a different loan, she said, her calls weren’t answered either.
“When we closed down the preschool, it wasn’t debt per se. It wasn’t like the revenue wasn’t coming in but these loans just made it impossible to bear,” Floyd said. “And when there’s a collection that starts to take place and then you fall behind a couple of thousand dollars here and there, it’s just a whirlwind effect with everything. The decision to close wasn’t solely on that, but it was a very significant part of it.”
The New Jersey Department of Community Affairs describes predatory lending as
“a variety of lending practices that may be disadvantageous to the borrower.”
For instance, it says that might mean issuing an unaffordable loan, based on a borrower’s assets, instead of the borrower’s ability to pay. It could mean convincing a borrower to refinance a loan repeatedly to charge high fees each time. A predatory lender might conceal the true nature of a loan from an “unsuspecting or unsophisticated” borrower, it says.
The Truth in Lending Act requires disclosures of terms such as annual percentage rates for consumer loans, but “no such disclosure requirements exist for small business lending,” the Opportunity Finance Network wrote in 2020, in a piece warning of the risk of predatory small business lending. The network is an association of community development financial institutions.
At the November event at Café Moso, Menendez said many loan companies have preyed on the desperation of business owners seeking financial relief during the pandemic. He said they provide easy approvals “with little to no documentation requirements and funding in under 24 hours.”
“They’re often not transparent about their loans and small businesses end up taking on debt,” Menendez said at the event. “[The business owners] do not understand, cannot afford and then struggle to replay.”
The Small Business Lending Disclosure Act of 2021 was introduced in November. It would give the Consumer Financial Protection Bureau the same authority for small business financing that it currently has for consumer financial products. It includes provisions to require disclosures of interest rates, finance charges, payment amounts, collateral requirements and other loan terms.
“In recent years, online lending for entrepreneurs and small businesses has grown, while many of these financial products are fair and help meet entrepreneurs’ capital needs, some carry enormous interest rates that can exceed 80% or even rise above triple digits without the rates being fully disclosed to borrowers,” Velázquez’s office said in an announcement of the legislation.
So far, the bill hasn’t advanced in either chamber.
“I think that the legislation is more to curtail the aggressiveness of these people thinking there’s nobody policing them,” Floyd said.
Floyd said she has learned from her experience, which prompted her to start teaching small, informal entrepreneurial workshops for small business owners. Anyone interested can email her about at email@example.com.
At the workshops, she shares her experiences as a business owner. She said she hopes she’ll help other business owners, both new and seasoned, to avoid the mistakes she made.
Floyd said the experience she went through with the loan company made her stronger because it required her to pay closer attention to what is going on with her finances.