A merchant cash advance is, at its core, a simple financial product, similar to some types of accounts receivable financing, such as factoring. A small business sells a set amount of its future revenue to the cash advance business at a large premium. For example, a construction company needing cash to pay its suppliers before its customers pay their bills could repay over $100,000 in daily or weekly direct debits for a $70,000 advance. It is definitely not a loan. But if you do the math as if it were a loan, interest rates can be in the triple digits.
This is where companies often run into trouble, as MCA companies usually start receiving receipts almost immediately.
If something goes wrong, cash advance companies turn to the courts with sophisticated formulas to go after corporate bank accounts. Because of New York’s ban on admission to judgment clauses, small businesses are no longer waiving their right to a trial. But lawsuits are still frequently served without sufficient notice or under extremely tight deadlines, said Leslie Tayne, a lawyer in Melville, Long Island. Tayne said she represents so many small business clients in MCA cases that she’s dropped her other practice areas over the past year to focus solely on the matter.
“It’s exploded,” she said. “For a year, that’s all I do every day.”
While it’s difficult to quantify the total number of cases or the rate of growth, cases have flooded every Supreme Court district in the state. While MCA companies are usually in town, the smaller companies that contract with them come from all over the United States.
For a time in 2020 and 2021, around $1 trillion in government relief programs kept small businesses relatively afloat. As recently as April this year, the share of small businesses with at least three months of cash was near its pandemic peak, according to information gathered by the Census Bureau’s Small Business Pulse Survey, which has since ceased. .
But with the return to normal, access to traditional financing has become more difficult for companies with fewer than 500 employees. The share of businesses seeking traditional financing fell from 43% in 2019 to 36% in 2021, and they were more often looking for cash for operating expenses than for expansion, according to the 2022 report. the Federal Reserve on small business credit on employing businesses. Additionally, the share of applicants who received all the traditional funding they sought fell from 51% in 2019 to 30% in 2021, according to the survey.
“It’s a perfect storm,” Tayne said.
Tayne said his customers represent a wide range of industries: trucking, construction and landscapers, as well as farmers, retailers, restaurants, housekeepers, dentists and technology services. While some businesses – and their cash advances – are quite small, others have multi-million dollar revenues.
The owner of a construction company in the New York metro area said he turned to cash advances around the time the business took off. Rapid growth in new home construction and renovations from a boiling housing market led to cash flow problems for the owner, who wished to remain anonymous for fear that information about his finances would affect his ability to sign clients or make things worse with his MCA relationship. He said he had around 20 employees and an annual income of around $5 million.
Several larger clients were spreading their bills over a longer period as he took on five new construction projects that required a substantial upfront capital outlay.
Because he needed money fast, a traditional line of credit wasn’t enough, and government loan products like the Small Business Administration’s 7a were too slow to ask for. As a relatively new business owner, he didn’t feel confident being approved for a conventional bank loan, he said.
Supply chain issues have made companies particularly cash-hungry, said Heskin, White and Williams’ partner. For example, a builder could find itself in a bind because lumber prices soar after signing fixed contracts with a customer. Or a trucker may be waiting for payment because a delivery does not arrive from abroad for months after it was scheduled.
Once refunds aren’t made, things go awry.
In the case of the builder, the company which had granted him the advance constituted a lien against him and against the company. Since the MCA company has access to a company’s current account, it can view its current account and contact its business customers and owners for payments. His debts and online accounts such as PayPal and Venmo have been frozen, he said. Then came threatening letters to his home.
The process of selling — and upselling — advances is also plagued with bad intentions, Tayne said.
Brokers offer funds to desperate businesses, and their commissions only add to the pile of fees to be reimbursed. Their sales lines sometimes contain untruths, such as the idea that MCAs will help a business build credit and lead to future successful loan applications, which it does not.
After a successful lead, companies will frequently hold another exchange, she said.
The local builder, for example, said it had managed to make all payments on the first two advances. “But once you have a good track record,” he said, “they give you more. It’s a revolving door of money. He added that once it’s been paid back about 60% on an advance, the companies approached him again to ask if he wanted access to more money.
One business in the city, a jeweler on West 47th Street, was sold three successive advances totaling nearly $1 million in two months, according to a complaint from Fox Capital Group, which sold the advance.
Common MCA companies in the state court system include Liberty Funding Solutions, Reliance Financial, Quicksilver Capital, and Last Chance Funding Group. Companies sometimes dissolve and reform, lawyers say,
“It’s very profitable,” Tayne said.
It is when a small business empties its checking account or cuts before full reimbursement that MCA companies begin to add fees. Then the MCA firms head to the courts.
They file lawsuits quickly and quickly — “like a machine,” Tayne said. “They’re ready to file on the exact day, and we often file responses the day they’re due.” Often the defendants are not even notified or do not have time to find a lawyer. MCA firms get the judgments they need to freeze bank accounts or put liens on a defendant’s assets.
Even with the ban on judgment confessions, New York has a fairly supportive law that makes it easier to go to court, said Julia Heald, an attorney with the Federal Trade Commission’s Financial Practices Division, Consumer Protection Bureau. .
“The original intent is that this is a quick and easy way to resolve the payment of an undisputed amount,” Heald explained.
In addition to a handful of private attorneys, the New York Attorney General and the Federal Trade Commission have filed and won several lawsuits against MCA companies this year. Generally, the government goes after the worst actors, Heald said.
While not necessarily a winner, a solid legal strategy seems to have emerged: if lawyers can prove that MCA works like a loan, then the company selling the money becomes subject to a lot more federal and state regulations. . , said Heskin.
Three recent decisions by a federal court in the Southern District of New York concluded exactly that, with judges ruling that several nefarious corporations, such as Financial District-based Richmond Capital Group, were deceiving and threatening small businesses. These follow an April 2021 ruling by the same court in favor of the FTC against Yellowstone Capital, based in Jersey City, New Jersey, which had to pay nearly $10 million in total to more than 7 700 small businesses. So far, 587 New York-based companies have received $778,512 in refunds from the case, according to the FTC tracker.
The bottom line in legal terms, Heald said, is that MCAs’ place in the financial system is to provide funds in return for taking the risk that a business might fail rather than getting the security that it can. help stabilize future payments regardless of the health of the business.
“If the MCA supplier was really buying a share of future revenue, which would go up and down as the business did, there’s something for the business as well,” she said.