The State of Merchant Cash Advance During the Coronavirus Pandemic
The MCA industry has experienced steady growth since its inception in 2008. Last year, MCA lenders funded an estimated $19 billion to small businesses, representing a substantial increase to the total industry funded amount of $8 billion, only five years ago.
Now, in a time of global economic slowdown due to the ongoing pandemic, regulators from the Federal government and certain state governments have begun to take notice of the merchant cash advance industry.
In this article we will look at the current state of the Merchant Cash Advance industry, the scrutiny the federal government has placed the industry under, MCA brokerage’s reaction to the COVID-19 pandemic, and what you can do if you are having trouble paying off your cash advance debts.
MCA Companies are Officially on the F.T.C. and S.E.C. Radar
Regulators have begun to focus their attention on the MCA alternative finance industry that has, for years, targeted small business operations for volatile high-cost loans. This new government attention has raised substantial concern for the entire merchant cash advance industry.
One such merchant cash advance lender, Par Funding, based out of Philadelphia, was raided by the FBI on July 28, 2020. Par Funding, who also operates under the name, Complete Business Solutions Group (CBSG), has been sued by the Securities and Exchange Commission, with the FBI performing the raid and records seizure of the Par Funding corporate headquarters.
The SEC’s case against Par Funding and others alleges that approximately $600 million was raised from investors through unregistered securities and that Par Funding then loaned/advanced to small businesses at extremely high repayments rates.
The SEC suit identified Joseph W. LaForte as “the de facto CEO of Par Funding”. LaForte was arrested August 7th, 2020, on a weapons charge in Pennsylvania. Investigators had found seven loaded guns in his possession, a criminal violation considering his prior felony convictions.
Critics point out that Par Funding’s loans are designed to fail, thereby allowing Par to profit more from defaulting clients than those who repay their loans in accordance with their contractual payment schedule.
In fact, the SEC alleges in its suit that the default rate of Par Funding loans exceeded fifty (50%) percent and court records demonstrate clearly that since 2013, Par Funding has filed no fewer than 2,500 lawsuits against merchant debtors in New York and Pennsylvania.
In defense of their enormous default rate of 50%, Par Funding has, in court, blamed coronavirus on a recent increase in defaults. However, court records show that Par Funding filed nearly 1,500 collection lawsuits in 2019 alone, before the onset of the Covid 19 pandemic.
FTC Alleges Merchant Cash Advance Provider Overcharged Small Business Owners
A leading merchant cash advance lender, Yellowstone Capital, has been accused by the Federal Trade Commission (FTC) of using deceptive practices to bait small business borrowers, then withdrew money from their accounts without their consent, even in situations where the customers had already repaid the money that they owed.
According to the FTC’s complaint, Yellowstone Capital withdrew hundreds or thousands of dollars from small businesses’ accounts after the customers had repaid the entire amounts owed in their contracts.
Additionally, the FTC complaint alleges that Yellowstone engaged in a practice to deceive potential customers regarding the amount of money they would be funded by Yellowstone, with the contract not disclosing additional fees that would be charged by the lender.
The FTC complaint goes on to further allege that Yellowstone employed deceptive marketing to promote their services.
Regulatory officials in furtherance of their investigations of MCA companies, state they are examining whether the funding arrangements should be subject to usury laws and federal and state lending protections.
“We’re looking hard to make sure that those lenders aren’t adding to the misery and setting small businesses up to fail,” said Rohit Chopra, a commissioner of the FTC, in an interview with NBC News. “We’ve started suing some of them and I’m looking for a systemic solution that makes sure they can all be wiped out before they do more damage.”
FTC and the New York Attorney General Target Two Merchant Cash Advance Companies
On June 10, 2020, the Federal Trade Commission and the New York Office of the Attorney General filed actions against two merchant cash advance (MCA) companies known as RCG Advances and Ram Capital Funding.
Both the FTC and New York Attorney General bring forth several claims against these merchant cash advance companies concerning their marketing practices, the offering of their financial products, and their overly aggressive and abusive collection practices.
These lawsuits present a real threat to the merchant cash advance industry and moreover, provide the beginnings of a roadmap as to the types of claims regulators may bring against MCA companies in the future.
Along with similar claims brought by the FTC, the New York Attorney General asserts that defendants “disguise each loan as a ‘Purchase and Sale of Future Receivables,’ but in reality…the transactions are loans.”
The New York Attorney General points to a number of examples as to why the so-called cash advances are, in fact, loans.
These examples include marketing their advances as loans; using underwriting policies that consider a merchant debtor’s credit rating and bank balances, as opposed to their receivables; and not reconciling or recharacterizing a debtor’s repayment of the advances if that debtor’s business suffers a downturn in revenue.
Although the Federal Trade Commission and the New York Attorney General complaints do not disavow the future of merchant cash advances as an alternative financial product available to small businesses going forward, the complaints do provide a window into what MCA lenders might be expecting in the form of future industry regulation.
Specifically, the New York Attorney General’s complaint related to the recharacterization of merchant cash advances as loans, provides substantial guidance for not only the proper drafting of an MCA contractual agreement, but also the underwriting of the financial products and the marketing of said products.
For the MCA companies, it should now be clear that state and federal regulatory agencies have taken a significant interest in their MCA industry and that those agencies intend to file legal actions against the bad actors in that industry.
Possible Consumer Financial Protection Bureau (CPFB) Oversight of MCA Industry
Applicable in her home state and on a federal level, U.S. Representative Nydia M. Velázquez of New York recently introduced H.R. 7889, the Small Business Lending Disclosure and Broker Regulation Act.
This Bill is designed to extend some of the protections available to consumer borrowers to small business borrowers as well.
Under Representative Velázquez’s bill, the Consumer Financial Protection Bureau (CFPB) would be granted the same regulatory authority over small business financing as the CFPB maintains regarding consumer financial services and products.
Key Takeaways from the Recently Filed FTC, SEC and New York Attorney General Actions
The current pandemic health crisis has greatly impacted small businesses across the entire country. Small businesses are struggling to keep their doors open and their owners need more, not less, protection from deceptive and unfair practices.
The FTC’s enforcement efforts offer some key insights into the problems with the merchant cash advance industry.
The FTC points out that, like other consumers, small businesses are protected under the FTC Act. The FTC Act provides the federal agency with the requisite authority to stop deceptive and unfair practices by companies, including lenders and finance providers, as well as marketers, lead generators, brokers, and debt collection agencies.
Two of the FTC key points of enforcement are:
1) Do not misrepresent the true nature and obligations of their alternative financing products.
The FTC’s recent legal actions against Yellowstone and RCG Advances, allege that these merchant cash advance providers misrepresented critical terms of their financial products, including the amounts that will actually be funded to the debtor, and that small business owners were required pledge collateral and sign personal guarantees to obtain subject cash advances.
2) When seeking to collect, do not make false or unlawful threats.
MCA companies must be wary of their historical tactics of over-collecting on amounts not contractually owed or making false threats of arrest, threats of violence and harassing consumers with constant phone calls and using abusive language.
Is Merchant Cash Advance Regulation on Its Way?
Merchant cash advance companies are beginning to be examined much more critically. It seems clear at this point, that some form of governmental regulation will be required to oversee the alternative financing industry.
If merchant cash advance regulation happens in the future, it will likely require rate disclosures, rate limitations, and other measures to prevent predatory lending.
This will not only help to protect small business owners but should also help legitimize the small business alternative lending industry, overall.
Also, the crackdown on unlawful collection activities have begun and it is expected that some governmental oversight related to debt collection activities will be mandated upon the merchant cash advance industry in the future.
Due to the Covid 19 Pandemic, are MCA Lenders Doing More to Help their Borrowers?
The short answer to this question is yes. The author of this article has witnessed greater flexibility demonstrated by the MCA lenders to work with their borrowers during the pandemic.
While, I don’t believe the motivation exists in the MCA industry to lend a helping hand to struggling small business owners, the fact is that many MCA lenders are experiencing a cash crunch themselves, with default rates currently much higher than normal.
An example would be a merchant debtor with a $1,600.00 per week debt service obligation, being able to successfully negotiate a temporary payment structure at $400.00 per week.
Again, the MCA lenders need money also and they are presently more flexible to reduce payments than they have ever been in the past.
What to Do if You are Struggling with MCA Debts or are at Risk of Default
Many small businesses are experiencing a decrease in cashflow during the Coronavirus pandemic, which is especially hard if they are already struggling with Merchant Cash Advance debt.
If you are struggling with debt or at risk of defaulting there are a few things that you can do in an effort to get some relief.
Call your MCA Company and Request Hardship Relief
The first measure we suggest to all potential clients, if they are already in default or likely to default on their merchant cash advance payments, is to call your merchant cash advance funder and explain to them that you are having a difficult time right now.
Request if they will modify your payment structure, or possibly allow a forbearance period of temporarily suspended payments.
Especially due to the Covid 19 pandemic, many MCA lenders are also facing a cash crunch. They are likely to offer some type of temporarily revised payment terms because, as they currently see it, it is much better to have something coming in rather than nothing.
Communication with Creditors & Vendors
First and foremost, it is simply good business practice to notify your creditors about the situation your business is facing.
Most lenders do NOT desire to litigate if they can avoid it. It may make more sense to the lender to accept reduced payments as opposed to incurring thousands of dollars in legal fees to sue, and even if they win a judgment (which might take a year or more), there is no guarantee that they will be able to collect.
Contact the Business Debt Law Group for Help with Your Merchant Cash Advance Debts or Lawsuits
If you are having difficulty in making payments under the terms of your merchant cash advance, or you have been unsuccessful in getting your MCA lender to agree to reduced payments or a total overall discount of your repayment amount, please call the Merchant Cash Advance attorneys at the Business Debt Law Group to discuss your options.
Unlike a debt settlement company, we are a law firm that can and will defend Merchant Cash Advance lawsuits that may be brought against you.
The senior partners at the Business Dent Law Group, Rumore, Jocelyn and Serra, possess more than combined sixty (60) years of experience helping small business and consumers with their creditor debtor difficulties and disputes. We are here to help.