Merchant Cash Advance Firms In NY AG’s Crosshairs

Confessions of judgement. Frozen bank accounts. Sky-high interest rates hitting small businesses … courtesy of small business lenders.

News came this week that New York Attorney General Barbara Underwood has opened an investigation into small business lending – specifically, whether finance firms known as merchant cash advance companies have been engaged in abusing their smaller customers.

Bloomberg reported that the AG is investigating whether the cash advance companies engaged in fraud or abused the New York State court system. That disclosure comes from an anonymous source.

“It’s reprehensible to defraud, deceive and harass small business owners through predatory debt collection practices and the abuse of our court system,” Underwood said in a statement to Bloomberg News, which, as the newswire stated, did not provide details. “If a company is engaging in fraudulent and deceptive conduct, we want to know.”

Among the companies that offer ready cash to SMBs subpoenaed thus far, according to the report, is one of the larger cash advance firms, Yellowstone Capital LLC.

The investigation comes in the wake of reports from Bloomberg over the past several weeks that detailed practices where fast-cash firms allegedly used the court system to “squeeze” the SMB clientele.

In typical cash advance practices, the lenders give money to these small business borrowers and charge annualized interest rates that can translate into the hundreds of percentage points. Noted Bloomberg, the high interest rates come as the lenders are able to skirt usury laws – primarily by stating that they are extending cash advances against future business earnings.

As noted in a more detailed Bloomberg article last month, several of these small business lenders have helped to transform the state courts into a “debt collection machine that is draining the bank accounts of thousands of small businesses.”

The weapon is known as a “confession of judgement” – and has been wielded against thousands of companies in New York State courts. Those documents mandate that borrowers forfeit the right to a court hearing. And without court processes in place, the lender can seize assets of the borrowers, including, of course, bank accounts. There have been more than 25,000 judgments obtained in the past six years, reported the newswire, spanning 350 lenders, who have gained $1.5 billion through those judgments.

In at least some cases, many of those lenders have forged documents or used other underhanded means to gain judgments.

At first glance, Yellowstone and its affiliates, as reported by Bloomberg, are among the most notable of the lenders that have been in receipt of confessions of judgments that total 25 percent of that $1.5 billion tally.

This comes amid a previous, and still pending, case that shows the New York AG’s focus on small business lending matters. In that case from a few years ago, the state sued a lender, Northern Leasing Systems, which was accused of using the New York courts to go after borrowers tied to leases for credit card processing equipment.

Merchant cash advances are still a relatively small source of funding for SMBs. As recounted in this space earlier in the year, small firms’ use of alternative finance platforms is on the rise. The Federal Reserve has shown that only 7 percent of small businesses that went to outside sources to tap funding last year did so through merchant cash advances.