But as the worst of the Covid pandemic subsided in 2021, state courts began to fill up again with cash advance companies seeking judgments against small businesses. Businesses struggled to cover operating expenses as federal pandemic programs dried up and labor shortages and supply chain challenges grew. As a result, businesses obviously turned to cash advances and then ran into trouble with them.

Now, two years after the trial ban admission drew attention to predatory practices in the industry, merchant cash advance companies have come up with new ways to find customers and recoup advances and clog up the courts again.

“It’s like Whac-A-Mole,” said Shane Heskin, a partner in the Philadelphia office of White and Williams, who has litigated several recent cases in New York on behalf of companies that took cash advances to merchants. , known as MCA. “There are so many bad actors, and there’s not enough police power to regulate these things,” he said. The resurgence of one such actor, Jonathan Braun, was documented earlier this year by Bloomberg’s business week.

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, according to Melville, Long Island attorney Leslie Tayne. She said she represents so many small business clients in MCA cases that she has 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.”

Cases have flooded New York state supreme courts in every district, though it’s hard to quantify the total number or rate of growth. And while merchant cash advance companies are typically located in New York, the small businesses that contract with them come from all over the United States.

Difficult moments

For a time in 2020 and 2021, around $1 trillion in government relief programs kept small businesses relatively afloat. As recently as April 2022, 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, since discontinued.

But with the return to normal, access to traditional financing became 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 variety 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 revenues.

The owner of a construction company in the greater New York metropolitan area said he turned to cash advances around the time the business took off. The 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 up customers or make things worse with his merchant cash advance 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 undertook five new construction projects that required large up-front costs.

Because he needed money fast, a traditional line of credit wasn’t enough, and government loan products like SBA’s 7a were too slow to ask for. As a relatively new business, he didn’t feel confident being approved for a conventional bank loan, he said.

Ongoing supply chain issues have made companies particularly cash-hungry, Heskin said. 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.

Considerable efforts

But once the refunds aren’t made, things go awry.

In the case of the builder, the company which had made the advance placed liens against him and against the company. Since the MCA has access to a company’s current account, it can view its current account and contact its business customers and owners for payments. They froze his debts, along with online accounts like PayPal and Venmo, 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 include untruths like the idea that MCAs will help a business build credit and lead to successful loan applications in the future, which it does not.

After a successful lead, companies will frequently hold another exchange, she said.

The local builder, for example, managed to make all payments on the first two advances, he said. “But once you have a good track record, they give you more. It’s a revolving door of money. He added that once he had been repaid around 60% on an advance, companies approached him again to ask if he wanted access to more.

One business in town, a jeweler on W. 47th St., 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 merchant cash advance companies in the New York State court system include Liberty Funding Solutions, Reliance Financial, Quicksilver Capital, and Last Chance Funding Group. Companies sometimes dissolve and reform, according to the lawyers involved. “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 MCAs 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.” Very often, defendants are not even notified or have no time to find an attorney, MCAs get the judgments they need to freeze bank accounts or put liens on a defendant’s assets.

Even with the ban on trial confessions, New York simply has a fairly favorable law that makes it easier to bring cases to our courts, said Julia Heald, an attorney with the Federal Trade Commission’s Financial Practices Division, Office of Protective consumers.

“The original intent is that this is a quick and easy way to resolve the payment of an undisputed amount,” Heald explained.

Legal jumps

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 it may not win Whac-a-mole, a solid legal strategy seems to have emerged: If lawyers can prove that the merchant cash advance works like a loan, then the company selling the money becomes subject to many more federal laws and state regulations, according to Heskin.

Three recent decisions by a federal court in the Southern District of New York have found exactly that, finding that the companies, including a June finding, that the same court that found the district-based Richmond Capital Group financier, deceived and threatened small businesses. These follow an April 2021 ruling by the same court in favor of the FTC against Jersey City-based Yellowstone Capital, 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 the place of merchant cash advances in the financial system is to provide funds in exchange for taking the risk that a business might fail rather than getting the collateral. that she can help herself to a stable future. payments regardless of business health.

“If the MCA supplier was really buying a share of future revenue that would go up and down as the business did, there’s something for the business as well,” she said.