Say you are a small business in need of liquidity to finance an expansion, or for the purchase of that desperately needed commercial printer, but do not have a well-developed business credit rating, or bad credit rating, what options do you have?
Well, worry not! There are "ingenious folks" who have designed the "Merchant Cash Advance" ("MCA"), which basically is a "factoring agreement", whereby these "funders" claim to purchase your business's future receivables at a discount, in return for providing you immediate cash.
Please also see our more recent post regarding developments involving the federal government crackdown on deceptive practices by Merchant Cash Advance Providers:
- The Federal Trade Commission Targets MCA Lender For Deceptive Acts and Unauthorized Withdrawals - August 22, 2020
Here is a 2011 Video From An Idiot Promoting The Sale of MCA's as A "Business Loan" - Explains The MCA From Salesperson's perspective And what A "Factoring Rate" means
How merchant cash advance providers can take advantage of small fleets YouTube - Overdrive Short Video Explaining The MCA
June 22, 2020
FTC official: Legal 'loan sharks' may be exploiting coronavirus to squeeze small businesses NBC News - April 03, 2020
June 2019 Update - NY Legislature Bans Use of COJ For MCA's Outside New York
See the 2018 Bloomberg series of articles on MCA's; Sign Here to Lose Everything
November 20, 2018 Bloomberg article "Confession of Judgment" that small business owners are required to sign as part of the MCA agreements
See also the November 27, 2018 Bloomberg article:The $1.7 Million Man - Meet New York City’s highest-earning official. He’s a debt collector for predatory lenders.
See also the November 29, 2018 Bloomberg article: Rubber Stamp JusticePredatory lenders have co-opted New York’s court system to put the screws to borrowers nationwide.
See also the December 03, 2018 Bloomberg article: Business Loan Kingpin, A drug smuggler built a predatory lending company while free on bail. Now the complaints are piling up.
See also December 20, 2018 Bloomberg article: Fall Behind on These Loans? You Might Get a Visit From Gino
See also the December 03, 2018 Bloomberg article: New York State Is Probing Abuses in Small-Business Lending
The claim is that these "advances" are not "loans", however they display many characteristics of a loan, where the owner or principal shareholder is required to execute a "personal guarantee" and these funders will also sue in an attempt to get their money back, which would hardly be considered "non-recourse" debt..
It is hard to believe, but many of these MCA "loan agreements" equate to what would be almost a 400% interest rate (APR). Typically, an MCA may recite (for example) that in return for an immediate payment of $100k under the agreement, you the business agree to sell rights for the funder to intercept $175k in all future receivables until the agreed upon "loan" amount of $175k is satisfied.
When signing up for these MCA's the business is also required to turn over access to these funders to access the business bank account, and access to the credit card processor, as these agreements typically are structured to intercept an agreed upon daily percentage of receipt received through ACH and/or credit card purchases. The funders (in a big brother manner) closely monitor the receivables to ensure that your business is not hiding monies received. However, the funder monitoring conveniently turns a blind eye to the down turn in business income than what was originally the case at the time of the origination of the MCA. The preceding clearly violates the contract, and is also indicative of being a "loan" not an "advance"
In fact these agreements attempt to distance themselves from being classified as a loan by stating that they are "non-recourse", meaning that the these funders "assume the risk that if the business goes and cannot repay, i.e that they "have no recourse". Clearly, these funders do not simply just walk away. In addition, the agreed daily percentage of intercepts should have be adjusted as to the amount of receivables actually received. In practice however, the percentage is methodically intercepted, even where a business desperately needs funds to make payroll and/or keep the "lights on".
If these MCA's would be considered a "loan" they clearly violate the Massachusetts Usury statute, G.L. c. 271, Section 49 which caps interest at 20%.
In fact, in a recent trial court matter before the Suffolk County Superior Court, a funder's Motion for Summary Judgment was denied with regard to the claim that an MCA was not a loan. the case is titled Forward Financing, LLC v NRO Boston, LLC, CIVIL ACTION NO 16-3332-D, Consolidated with 16-2522, 16-2523, May 23, 2018 Wilkins, J (Suff. Sup. Ct)
We are one of the very few, possibly only, firms in Massachusetts that has experience with these insidious business "pay-day loans", which can very quickly spiral out of control, and lead to the shuttering of your business unless you take immediate massive action to combat these thugs.
Additionally, where consumer protection statutes usually do not apply to a commercial entity, there may be an exception to that rule here in Massachusetts, where the consumer protection statute G.L. c. 93A, Section 11 applies to businesses.
We have filed litigation against these "funders", and additionally have successfully settled outstanding MCA claim's where the business owner is being threatened with being sued by the funder, and/or where the funder has "seized" all monies from all receivables to apply to the MCA which would effectively terminate the business. This is where we step in to negotiate, and or file offensive litigation to prevent the strangulation and termination of the business.
We also negotiate settlements on behalf of small busineses that have achieved significant savings
Also see our Merchant Cash Advance page
If you are facing issues relative to an MCA, please do not hesitate as time is of the essence. Please contact us for more information as to possible strategies to combat these insidious business "pay day loans"