New York AG Launches Investigation into Merchant Cash Advance Companies

By Robert Jacovetti

Recently, Barbara Underwood, New York’s Attorney General, has launched an investigation into potential abuses conducted by merchant cash advance companies. Merchant cash advance companies are financial firms that offer quick money solutions to small businesses. According to Bloomberg News, the Attorney General’s office is looking into whether these companies have committed fraud or abused the court system. At the end of November 2018, the Attorney General’s office subpoenaed Yellowstone Capital LLC, one of the largest merchant cash advance companies.

A merchant cash advance is a lump sum payment to a business in exchange for an agreed-upon percentage of credit card sales. Merchant cash advance companies market this quick financing option to contractors, truckers, and other small business owners. Oftentimes, the merchant cash advance lenders will charge sky-high interest rates, some as high as 400 percent. These companies avoid usury laws that limit lenders from charging high-interest rates because merchant cash advances are not loans, but rather a sale of a portion of a business’ future credit or debit card sales. Court judges have generally recognized the distinction between merchant cash advances and loans.

Merchant cash advance lenders have been aggressive in claiming their return on investment in New York courts. Often debt-collection of merchant cash advances results in the draining of small business bank account due to the high interest rates. Lenders may also require businesses to sign a confession of judgment, a legal document that prohibits borrowers from defending themselves in court once they fail to pay back the cash advance. When a confession of judgment is signed and a borrower defaults on their payments, the lender can be quick to accuse the business of not paying and may seize their assets. In recent interviews and court filings, borrowers claimed that merchant cash companies have lied about the sums owed, forged documents, and fabricated defaults on payments.

Although some states have outlawed confession of judgments, New York recognizes them regardless of where the borrower is located. According to Bloomberg, since 2012, merchant cash advance lenders have obtained more than 25,000 confessions of judgments in New York State that are worth upwards of $1.5 billion. Yellowstone Capital LLC and its affiliate organizations are the biggest users of these confessions, responsible for 25 percent of the total, according to Bloomberg.

As of now, the Attorney General’s civil probe is in its early stages and may not result in enforcement action against Yellowstone or other merchant cash advance companies.

While merchant cash advances can be a quick route to business financing, they may lead to detrimental debt and financial hardship down the line. If you are a business owner and have defaulted or are about to default on your merchant cash advance, it is important that you speak with an experienced merchant cash advance defense lawyer. Robert Jacovetti of the Law Office of Jacovetti Law, P.C. is experienced in handling merchant cash advance defense matters. Mr. Jacovetti works with business owners to assess their debt situation and advise them of pathways to financial stability. For more information or to schedule a consultation, you can call (516) 217-4488 or schedule an appointment in our Mineola office.