Protecting small business clients from predatory loans

CPAs play a vital role in steering clients away from harmful loans.
By Kelly Hinchcliffe

Nancy McClelland, CPA, has a master's degree in accounting and financial management, but what she really needs at times is a psychology degree, she says. As a CPA, she counsels clients through financial hardships, including small business owners who fall prey to predatory loans. She listens to their stories and hears the shame and embarrassment in their voices.

"[They] feel like, 'I should have known better. How did I not see this?'" said Chicago-based McClelland, who specializes in accounting services for small businesses. "Anybody who's been taken advantage of, there are those feelings of guilt."

Predatory lenders, such as merchant cash advance lenders and online lenders, often deceive and coerce borrowers into unfair and abusive terms, according to the U.S. Small Business Administration (SBA). Their interest rates are significantly higher than competitors' rates, or they charge fees that are more than 5% of t­­he loan value.

Small businesses are a "perfect target," according to McClelland, because the owners are usually skilled at their craft — but not as adept at running a business or handling finances. The need for financial aid is especially heightened now with the coronavirus pandemic severely affecting many small businesses' ability to earn income.

McClelland and two other CPAs who work with small businesses offered tips for how to identify these kinds of loans and help steer clients away from them.

They're not always called 'loans'

Predatory loans aren't always called "loans," according to McClelland. They are often hidden in language and disguised as a "cash advance" or another name. A few years ago, McClelland had a client who signed a "future receivables purchase and sale agreement" that ended up being a predatory loan.

"The reason they're not going to call themselves a 'loan' is that then they're going to be beholden to all the rules that surround loans. There are no rules or regulations surrounding cash advances," she said.

McClelland estimates she has seen more than 25 clients with predatory loans in the past 20 years, and there were probably more she didn't know about. Three of her clients are dealing with predatory loans right now.

"They're really, really common, because they're disguised," she said. "The clients do not think of them as predatory loans. Everybody presumes that predatory lending is regulated, because for consumer loans, they are. But for business loans, they actually are not regulated."

U.S. Rep. Nydia Velázquez, D-N.Y., chairwoman of the House Small Business Committee, introduced legislation in July aimed at protecting small business borrowers from predatory lenders. Her bill, the Small Business Lending Disclosure and Broker Regulation Act, H.R. 7889, would ensure many safeguards already required in consumer lending would also apply to small business credit markets.

Beware of subscription services offering 'loans'

Small businesses should beware of taking loans from online product and subscription services, such as point-of-sale, bookkeeping, and merchant services systems, according to McClelland.

These services have direct access to small businesses' financial data and may seem to be looking out for the owners' best interest, but they aren't always.

"That system pops up every day and says, 'Hey, are you having problems making payroll? Hey, are you having cash flow issues? … We can give you this money, and we can take it out over time as a percentage of sales,'" McClelland said. "That's why it's so dangerous. These are trusted partners."

McClelland discovered one of her clients — a café owner — got a loan from a point-of-sale system with an interest rate of 13% per month. If the loan had continued for a year, the interest rate would have been 156%, but she was able to help her client before it reached that point.

"Once I calculated that for them and they saw what was going on, then they finally stopped," she said. "Had this client been up on their monthly bookkeeping, I would have noticed it sooner, but they were behind and they kept saying, 'Hold off. Don't look yet.'"

McClelland counseled her client through the financial mistake and said they were "absolutely stunned" to find out they were the victims of a predatory loan.

"Unfortunately, they felt stupid," she said. "They were apologetic. They were ashamed and embarrassed." But CPAs should make clear that clients were targeted, not stupid, and have no reason to feel embarrassed.

Check in with clients, but don't be quick to bill

One of the best ways to prevent predatory loans is to reach out to your small business clients and simply ask how they are doing, said Chrisa Anderson, CPA, with CL Anderson & Associates in Avon, Ill.

"Ask them if they are struggling. Ask them if they need help, and give them ideas," she said. "Be proactive with your clients."

Anderson has only had a few clients — that she knows of — who have had issues with predatory loans. One client, who is in construction, got payday loans to get the upfront money to take jobs. He then suffered serious medical issues, got more payday loans, and fell further behind.

"It's so sad," Anderson said. "I think a lot of clients are embarrassed, and I probably don't even know that they are [or] were in trouble."

CPAs should also encourage their small business clients to reach out for help before taking a loan. But don't be so quick to charge them, said Jean Brandt, CPA, with Brandt Accounting Inc. in Barrington, Ill.

"Honestly, I'd rather spend a few non-chargeable minutes with them on a phone call if someone's going to get a loan than to try and clean up a mess later on," she said.

Share trustworthy sources of financial support

McClelland, Anderson, and Brandt urge fellow CPAs to help small business clients find trustworthy sources of financial support. They suggest some of the following resources:

When you discover a new source of financial support that might be helpful, email that information to your clients, post the details on a blog, create a Facebook group, or reach out another way.

— Kelly Hinchcliffe is a freelance writer based in North Carolina. To comment on this article or to suggest an idea for another article, contact Drew Adamek, a JofA senior editor, at

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