When it comes to the survival of our struggling small-business community, access to capital is key. Business owners need continuous funding to launch and grow their business, create jobs and build wealth in their communities. Unfortunately, capital access continues to be one of the greatest challenges facing entrepreneurs in Kingston and across the state today, particularly given the economic downturn caused by COVID-19.

However, a little-known problem has exacerbated access-to-capital challenges and disproportionately targets business owners of color. This invisible perpetrator continues to pose a grave threat to the success of our business community and we must bring it into the light before it is too late.

As bank lending to all small businesses has declined since the Great Recession, underserved businesses have increasingly turned to alternative financing products to meet their credit needs. Federal Reserve research has found that the number of small businesses applying to online lenders has steadily risen in recent years. When it comes to race, the Fed’s 2020 Report on Employer Firms revealed that Black-owned businesses are most likely to apply to online lenders at 27 percent likely, compared to 19 percent for white-owned businesses and 22 percent for Hispanic-owned businesses. Another Fed report found that “minority-owned firms more frequently applied for potentially higher-cost and less-transparent [alternative] credit products.”

The credit products the Fed describes as “higher-cost and less-transparent” include factoring and merchant cash advances (MCAs). MCAs require minimal documentation or underwriting, which removes barriers to capital access — but at a price. A study found MCAs are often accompanied by very high rates and fees, to the tune of 94 percent or higher annual percentage rates. That study also found that MCA payments were nearly double the business owners’ net income. Unaffordable payments often force MCA borrowers to eventually refinance the debt into a more affordable option or face closure.

In some cases, high-cost MCAs or factoring products might suit the needs of small businesses. However, as is often the case, the devil is in the details. And critical details about the price, terms, and prepayment polices of these products are not currently disclosed to the small businesses applying for them.

The concern with these products, then, is not access to capital but access to information. Small businesses, and especially minority-owned businesses that are more likely to apply for alternative credit, are currently operating at a disadvantage due to a lack of basic consumer protections from state or federal law. While the Truth in Lending Act requires financing providers to disclose APRs and other key metrics to consumers when they apply for mortgages, credit cards, auto loans, etc., no such requirements exist when it comes to business financing. This lack of oversight has led to a breeding ground of misinformation, with dire consequences for business owners.

Right now, MCAs and factoring companies are permitted to disclose, or not disclose, whatever information they choose. A Federal Reserve study on small business financing found that alternative financing providers currently disclose their pricing with metrics like “simple interest rates” or “fee rates” that small business owners confuse with annual percentage rate. These “rates” are lower than their equivalent APRs, making the products look more attractive to prospective borrowers. This deception leads small businesses to underestimate the true cost and take on unaffordable debt unknowingly.

Fortunately, the State Legislature acted swiftly to pass the Small Business Truth in Lending Act in July. Once enacted, this law will for the first time require alternative financing companies to clearly disclose APR, prepayment costs and other key metrics that help small businesses make informed decisions and avoid irreparable financial harm. As our small-business community remains vulnerable to a pandemic with no end in sight and continues to be shut out of getting bank loans, the need to implement the Small Business Truth in Lending Act could not be more critical.

I urge Governor Cuomo to bring sunshine to the alternative financing market and implement the Act as soon as possible. Our businesses cannot afford to wait.

About the author

Anthony Gaddy is a co-founder and president/CEO of the UpState New York Black Chamber of Commerce. Founded in 2019, The UpState New York Black Chamber of Commerce is based in the Capital Region and also serves Buffalo, Rochester, Syracuse, Hudson, Kingston, Newburgh and Poughkeepsie.

Raised in Albany, Anthony is a graduate of The Albany Academies and attended the University of Chicago, where he majored in economics before transferring to the University of Southern California. He’s ventured into industries including apparel, the music business and publishing a magazine. Currently, he is in the process of launching a media and public relations agency, as well as a TV/film production company.

Anthony is also very active in the community, having served as vice-president of the Schenectady County Public Libraries, the NAACP and the Empire State Black Arts & Cultural Festival and several other organizations. He currently serves as vice-president of 4th Family, an Albany-based nonprofit that focuses on teaching STEM through sports.

In his "spare" time, Anthony enjoys spending time with family and the closest friends he considers family, reading, traveling, movies, listening to music and playing guitar, inspired by all things Edward Van Halen.

Anthony and his colleagues are committed to building and supporting Black and minority-owned businesses throughout New York and the United States, while also helping to build a stronger overall business community in the Capital Region and Upstate New York.