Federal and state authorities are targeting companies that allegedly lend money to small businesses at extreme rates and seek to collect payments with heavy-handed tactics, NBC News reported Tuesday (Aug. 11).
The network said it heard stories of questionable treatment by what are called “merchant cash advance companies” from owners of small businesses in six states. A merchant cash advance company typically issues what effectively, though perhaps not legally, are loans to businesses based on current revenue streams and as a condition requires permission to withdraw payments directly from the merchants’ bank accounts.
Merchant cash advance companies avoid much of the regulation banks face by claiming that rather than giving loans to businesses, they’re paying the business cash now in return for a cut of future revenue.
Critics argue that the total cash outflow required of businesses that get money from merchant cash advance companies can be disastrous.
In some cases, NBC News reported, business owners took payments from companies’ bank accounts even after COVID-19 struck. One business owners said he felt as if he were dealing with an entity almost like “a gangster operation.”
The network said recent government actions against players in the industry include a July 28 FBI raid and related Securities and Exchange Commission lawsuit against Par Funding of Philadelphia; a Federal Trade Commission (FTC) suit against RCG Advances of New York; and an FTC suit against Yellowstone Capital of New York — have been sued by the Federal Trade Commission for allegedly misrepresenting the terms of their financings. Representatives of the companies either denied wrongdoing or declined to comment.
In an interview with NBC News, FTC Commissioner Rohit Chopra said, “We’re looking hard to make sure that those lenders aren’t adding to the misery and setting small businesses up to fail. 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.”