MCA Funders in Legal Jeopardy Due to New Court Decisions
The merchant cash advance (MCA) industry has often walked a “legal” tight rope in its product offerings. Funders take the position that they are not making “loans” which would otherwise require them to charge legal interest in the states in which these products are offered because their products represent a purchase of a percentage of future sales of a business and that the repayment and timing of these amounts are contingent on such future sales.
Nevertheless, MCA providers have tried to protect their investment by incorporating payment features and terms that more closely mirror true loans. These questionable features include daily, or weekly fixed payment amounts and some form of personal guaranty for non-payment or bankruptcy of the business.
Recent decisions by the U.S. District Court for the Southern District of NY (in Manhattan) have called these practices into question in upholding legal challenges to these practices as a legal sham which may violate the Racketeering and Corrupt Practices Act (“RICO”). In brief, the Court found that RICO may have been violated by an MCA provider whose contracts incorporate fixed payment schemes which are not based upon a good faith estimate of the payments required to repay the receivables purchase over a projected period of time. These contracts also contained onerous and illusory provisions that did not give the merchants an adequate opportunity to “reconcile” the actual payments made to the amounts owed, and personal guarantees that eliminated risk to the funders. The Court determined that these terms and the collection on such contracts can amount to wire fraud and a violation of RICO in attempting to collect an illegal debt.
Are you working with an MCA funder that may be involved in an illegal scheme? Are you subjecting yourself to legal jeopardy for acting as the referral source for these funders? Is this good for your business and in the best interests of your customers?
ARF has been in business for over 21 years. We are a licensed lender and the first company to partner with banks to offer commercial loans to small businesses. ARF is the only provider in the industry that is fully bank compliant. Our programs have been reviewed by the FDIC and by the state banking regulators of our bank partners multiple times. The financial products we offer are loans and are legal in all states in which we do business. Our product offerings are clear and understandable to our customers with numerous advantages over MCAs. For a better comparison, you can go to this link: https://www.arffinancial.com/merchant-cash-advance-cons/