Beware: Making Loans to Businesses in New York

If you are about to extend credit to a business in New York, there are many things you need to consider. How likely are they to pay me back? What interest rate should I charge? What should I do if they default on the loan? These are all important considerations.

However, there might be a big issue that you are overlooking: New York's usury laws. Usury laws set maximum interest rates and are intended to protect the public from unscrupulous lenders. Generally, New York's usury laws cap a loan's interest at 6%.[1] But, lenders don’t need to worry about this law when making loans to businesses; it only applies to lending money to individuals.[2] So, loans made to businesses can charge interest in excess of 6%.

A loan could make you a criminal.

But wait, there’s another New York usury law that you might not be aware of. If you charge more than 25% interest you are guilty of criminal usury.[3] Aside from potential criminal penalties, what happens if you charge a criminal rate of interest?

A New York court very recently decided this question in a case called Manganello v. Park Slope Advanced Medical PLLC. The answer is: you lose everything. A lender can not collect the interest or the principal. EVERYTHING.

This is what happened to Mr. Manganello. He loaned $100,000 to Park Slope Advanced Medical PLLC.[4] The loan became due after 90 days with $10,000 in interest.[5] The court calculated the interest per annum, which was 40%.[6] This put the loan well above the 25% interest allowable in New York. The court held that Manganello couldn’t recover anything.[7] Manganello even argued that the loan represented his life’s savings, but the court did not care.[8]

Don’t be like Manganello.

What can you take away from this? Just be cautious that you never charge more than 25% interest. If you do, and you try to collect in court, you will walk away with nothing. Absolutely nothing. Zilch. Nada. Make sure you pay attention to New York’s usury laws if you decide to make a loan to a business in New York.

[1] New York General Obligations Law § 5-501

[2] New York General Obligations Law § 5-521

[3] New York Penal Law § 190.40

[4] Manganello v. Park Slope Advanced Med. PLLC, 984 N.Y.S.2d 632, 632 (Suffolk County, Feb. 7, 2014.)

[5] Id.

[6] Id.

[7] Id.

[8] Id.