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Recent bankruptcy cases are highlighting the harsh impact that merchant cash advance (MCA) lenders are having on small businesses and their owners. Lenders of these MCAs are being cast as usurious short-term loans that are negatively affecting small businesses that are desperate to make ends meet.
Debtors and trustees have been fighting the lenders who are behind MCAs that small businesses are receiving, claiming them to be short-term loans at illegal and unreasonably high interest rates. Since these businesses are often trying to stay afloat, they are likely to do whatever it takes to remain in business, even if it means taking on loans with unreasonably high interest rates, which are often illegal.
MCA lenders are now getting attention from the U.S. Securities and Exchange Commission for their practices as well as from various state attorneys general for their high interest rates. However, in a report from Law360, Joe Luzinski of Development Specialists Inc. stated that many of the lenders are operating lawfully.
“It is a legitimate industry with lots of very specific rules and regulations that has a lot of illegitimate people working in it and a lot of fringe people working at the back end (in collections),” Luzinski said in the Law360 report.
MCA companies usually operate by claiming they will buy a portion of the business’s future sales revenue at a discounted rate in exchange for cash. The MCA companies will then begin withdrawing fixed amounts from the business’s bank accounts on a regular basis. This can lead to the business running out of funds to achieve the agreement of their MCA lender, causing them to take on more MCA agreements.
Typically, when a business gets an MCA, it will get another eventually despite provisions stating that borrowers are not to stack up multiple advances. It has proven to be difficult for businesses to get out of this loop, as lenders will begin offering to roll existing agreements into new ones, creating a cycle of these small businesses taking on more and more debt. Neil Sader, Managing Member of Sader Law Firm, succinctly puts it this way: “Unfortunately, the answer for businesses that borrow too much is not to borrow more. It’s best to eliminate the debts and that is what bankruptcy can do.”
Many businesses are struggling with the increased costs of operation and are often looking for any way to make ends meet, even if that means taking on more debt than you might be able to repay. If you are a small business facing overwhelming debt and want to know what the next best steps should be, talk to a professional at Sader Law Firm today. The attorneys at Sader Law Firm are available to answer all questions and figure out the best course of action for you and your business. Contact us at (816) 561-1818 for a free phone consultation and learn more about what actions might be the best decision for you.
