In June, New York Attorney General Letitia Jones filed a lawsuit against three merchant cash advance companies: Richmond Capital Group, Ram Capital Funding, and Viceroy Capital Funding. In a press release, Jones described that the three companies were offering illegal loans to their clients. The state is charging these companies with imposing extremely high interest rates—1000 percent in some cases—along with charging undisclosed fees. In addition, the lawsuit states that the companies were withdrawing funds from their client’s bank accounts and filing false court affidavits against their borrowers.
The lawsuit against the three companies was filed on June 10th and is the culmination of an 18 month-long investigation into the practices of these predatory companies. The investigation found that the three merchant cash advance companies were using aggressive threats to bully their clients into paying their debts. In some cases, these threats included unlawful acts of violence. For example, the investigation found that on multiple occasions, a company had insinuated that if their clients did not make their payments, their family members would be injured. In addition, the investigation found that the companies collected approximately $77 million on loans with illegal interest rates.
The lawsuit filed by Attorney General Jones reflects the widespread corruption in the merchant lending industry. In recent years, scrutiny against merchant lending companies has increased, as many of them have been found offering unfair contracts to vulnerable businesses. As a result of shady merchant cash advances, many small companies are plagued by business debt. Outlined below is some important information to know about merchant lending.
What Is a Merchant Cash Advance?
Traditionally, merchant cash advances have been used by businesses that rely on credit and debit transactions for revenue—such as restaurants or clothing stores—as a source of short-term funding for business growth. While a merchant cash advance is not considered a loan, it is borrowed against the future credit card sales of the company receiving the cash advance. Think of it as a consumer “payday” loan for a business.
How Merchant Cash Advances Work
When a company receives a merchant cash advance, the lender will provide them with a lump-sum of money. The merchant lender will then receive a percentage of the revenue from future credit card sales until the principal and fees are paid off. In an ideal world, a merchant cash advance and its associated fees are repaid to the lender within 6–12 months. However, this is often not the case.
The amount your business will pay in fees is determined by how quickly you can repay your cash advance along with a “factor rate” determined by the lender. Usually, this factor rate will range between 1 and 1.5 percent and is determined based on the lender’s perceived risk of the transaction. To calculate how much you will have to repay your merchant lender, multiply your factor rate by the principal of your cash advance. For example, if you received a cash advance of $15,000 with a factor rate of 1.3, you will have to pay a total of $19,500 plus any interest.
The Problem With Merchant Cash Advances
Since merchant cash advances offer a quick way to receive money and don’t require any collateral, they can be an appealing choice for businesses. However, merchant cash advances have many drawbacks and, ultimately, should be used only as a last resort.
The majority of merchant cash advances have extremely high interest rates—with some agreements resulting in APRs (annual percentage rates) in the triple digits—and are way more expensive than traditional bank loans. For comparison, a traditional bank loan usually has an interest rate of 10 percent, whereas a merchant cash advance could have an interest rate of 100 percent or more.
Even if your sales are high and it’s looking like you’ll be able to pay off your merchant cash advance in a timely manner, you can still end up paying a lot in interest and fees. In fact, for merchant cash advances, higher sales are often accompanied by a higher interest rate. Since merchant cash advances are not classified as loans, they are not regulated by the federal government. As a result, greedy lenders—such as the ones being sued by the state of New York—are able to impose predatory practices on vulnerable groups with little oversight.
Consult a Skilled Debt Settlement Lawyer
If you are struggling to get out of a debt cycle caused by a merchant cash advance, the lawyers at McCarthy Law are here to help. Our team is dedicated to helping our clients navigate their financial circumstances and reach a favorable debt settlement. We understand the overwhelming burden that debt can have on people’s lives and are committed to helping clients end the devastating cycle of debt. To schedule a consultation with one of our skilled debt settlement paralegals, call our office at (855) 976-5777 or fill out our online contact form.