Merchant Cash Advances
Merchant cash advances (MCA’s) provide small businesses with an alternative from traditional bank loans. Business owners receive funds as a lump sum upfront from a merchant cash advance provider and repay the advance with a percentage of the business’s sales. However, while this scenario might seem to make sense to businesses which need cash quickly, the terms of such financing agreements have been come under increasing scrutiny from the FCC and NY AG’s office, due to their alleged deceptive business practices, and the fact that the re-payment arrangements come at very high rates compared to the amount of funding which was advanced by the MCA companies.
In Federal Trade Commission v. Yellowstone Capital, The FTC alleges in its complaint that MCA’s have engaged in deceptive acts or practices through the following conduct:
Representing in advertisements that they did not require collateral or personal guarantees from business owners when, in reality, they did require business owners to grant a purported security interest, representing in contracts that the borrowers would provide a certain amount of funding when, in reality, the amount provided was substantially less as result of the withholding of fees that are mentioned “several pages in to the contract without any indication that they are deducted from the ‘Purchase Price’—the funds promised to consumers.” Furthermore, FTC alleged that Yellowstone and its owners continued withdrawing money from businesses’ bank accounts for days after their balance had been repaid. The complaint alleged that these unauthorized withdrawals left businesses without needed cash and that any refunds from the company could take weeks or months.
As a result of the forgoing, Yellowstone Capital, agreed to a $9.8 million settlement based on the fact that it took money from businesses’ bank accounts without permission and deceived them about the amount of financing business owners would receive and other features of its financing products, and have agreed to required compliance monitoring and reporting to the FTC (see attached).
In another action, Federal Trade Commission, v. RCG Advances, LLC (a companion case has also been brought by the NY AG)- The FTC case alleges that, since at least 2015, the defendants have deceived small businesses and other organizations by misrepresenting the terms of merchant cash advances they provided, and then used unfair collection practices, including threatening physical violence, to compel consumers to pay. The FTC also alleges that defendants have made unauthorized withdrawals from consumers’ accounts.
Recent cases on MCA's have held as follows:
a) Florida’s Appellate Court has stated that the “MCA purchase and sale agreement was not a loan, and therefore not subject to Florida’s criminal usury statute” Craton Entertainment, LLC v. Merchant Capital Group, LLC, reasoning that transaction is not indicative of a loan where repayment obligation is not absolute, but rather contingent or dependent upon the success of the underlying venture, and transactions in which a portion of the investment is at speculative risk" are "excluded from the usury statutes.
b) New York Supreme Court, held that the agreement was not subject to usury, as it was the same type of agreement as a factoring agreement. Principis Capital LLC v Team Van Eyk, Inc., citing Champion Auto Sales, LLC v Pearl Beta Funding – In addition, The individual defendants also signed the agreement as personal guarantors of performance, which was upheld in this matter
These agreements seem to permit filing UCCs, because if the business defaults on your merchant cash advances, the MCA can send UCC liens to the businesses customers, demanding that they pay the funders directly rather than paying the business, in connection with the purchase of your future receivables.
Based on these cases, while it is true that these agreements have survived characterization as usurious loans, it is likely that further regulations are likely to be passed against the industry, particularly by the FTC, to monitor the business practice of this industry.