New York MCA Final Disclosure Laws

DO ANY REGULATIONS EXIST THAT GOVERN A MERCHANT CASH ADVANCE?

• New York State, by all accounts the haven State for Merchant Cash Advances, ironically is also one of the first States to enact laws that require certain consumer like disclosures even for several commercial loans.
• This is significant development since New York’s Commercial Finance Disclosure Law (CFDL) went into effect August 1st, 2023 and in the law the CFDL has extended disclosure requirements ordinarily required for consumer lending to commercial financing instruments such as a merchant cash advance.
• The laws apply equally to both MCA brokers and MCA funders.
• The final rules are a good start, but fall short in several areas. For example an MCA Funder is exempt from full disclosure if they are “partnered” with FDIC insured banks. Another shortfall is the inclusion of a $2,500,000 cap. Thus, commercial financing in excess of $2.5M is exempt from the CFDL. Hardly ideal.
• Still in comparison to other States that enacted similar laws such as Virginia, California and Utah, the New York law goes a little further.
• The CFDL was in fact originally passed in 2020 and later amended to include additional commercial financing instruments such as a Merchant Cash Advance.
• Since 2020, the New York Department of Financial Services NYDFS issued multiple versions of the regulation and the law finally took effect on August 1, 2023.

Significant Adoptions of the CFDL:

• Bank Exception: MCA Entities of which a majority of the voting power or equity interest is owned, directly or indirectly, by a financial institution will be exempt from the CFDL. The most common institution would be a depository bank.
• New York Nexus:The final rules severely narrow the geography of where a transaction takes place or where the parties are from, in order to trigger the applicability of the CFDL.
• MCA Recipient Located:The final rules limit the CFDL to transactions where the recipient is directed or managed from New York or is a resident of New York. This is very similar to California’s law. Both NY and CA allow a Merchant Cash Advance Funder to rely on the business address provided by the recipient in its application for financing to make the determination.
• Assignment:The law permits a Merchant Cash Advance Funder to assign their rights in the MCA Contract.
• Broker Compensation Disclosure: The final rules require any commercial financing that incorporates a Broker that the MCA Funder must inform the Business receiving the MCA in writing of how and by whom the broker will be compensated.
• Finance Charge Calculation: The final rules provide that the finance charge on a transaction should be calculated and disclosed. This means the fees that the Merchant Cash Advance Funder usually charges for underwriting and origination.

Merchant Cash Advance 101 – Explained

Beginning early 2010, after the Great Recession, when the American housing market blew up and the world fell into a financial crisis, conventional banking institutions, for example Chase Bank and Citi, were unwilling to extend credit to small businesses.

As a direct result of the housing debacle, banks reacted with a plethora of new internal regulation, making it almost impossible for the average small business to qualify for a business loan.

Worse yet, the Government’s intervention in saving the banking industry, brought with it more regulation, laws and strict underwriting standards, making it exceedingly unlikely for a small business to obtain necessary financing.

With an abundance of new regulation, credit underwriting standards inevitably increased to such an extent, that most small businesses were left out in the cold, unable to obtain working or start-up capital, thus leaving a massive void in the lending to small business space.

As such, the time was ripe for someone or something to address the lack of credit and lending to small business.

What arrived next was enormous growth in a previously obscure lending instrument, ubiquitously known as a Merchant Cash Advance. A seemingly legal transaction whereby a predatory lender is permitted to charge what ordinarily would be considered usurious interest, without being guilty of breaking the law.

A Merchant Cash Advance or MCA (as the industry refers to it), was neither proprietary nor patented. In fact, its creation occurred more than a decade earlier. The owner of a Gymboree needing funds today to tide the business over through the slow months, invented the technology to allow for the purchase and sale of future receivables. The patent was later challenged by another Merchant Cash Advance funder, subsequently the patent was lost and the doors opened to a host of new MCA lenders.

2010 saw a large increase in MCA loan origination. This growth can be attributed to the economic circumstances and fledging economy at that time. It was a perfect combination of circumstance and timing. Small business lending had all but dried up, demand for funding had risen sharply and the resulting turmoil presented both the conditions and timing necessary for the MCA industry to grow exponentially.

As a direct result of the economic crisis back then, an environment for alternative lending opened to meet small business demand and plug the lending gap left by conventional banking institutions. The predominant and favorite tool predatory lenders leaned upon, was the offering of a Merchant Cash Advance to an unsuspecting small business owner.

The industry has been booming ever since and without regulation and no barrier to entry, hundreds of participants have entered the MCA lending sphere. While many engage in deceptive lending practices together with other predatory abuses, including illegal collection methods, harassment and fraud, there are some participants that do follow the law.

To a predatory lender a Merchant Cash Advance is like no other lending instrument. It requires no disclosures, permits usurious interest and is unregulated.

Abuses have naturally followed. Many lending scandals have since sprung forth and slowly, States like New York are accumulating a body of Case Law on MCA’s and their legality.

However, since no law presently exists to govern the MCA space, the cases that have gone before the NY Courts have been decided upon the specific case facts relating to that matter. Notwithstanding this lack of regulation, New York recently passed SB 5470 but it is yet to be enacted. SB 5740 are laws requiring Merchant Cash Advance funders to disclose certain information about the MCA and its loan terms to the potential borrowing Merchant. This is a good start to reforming the space and limiting abuses.

However, sadly many businesses have been destroyed because of these loans like funding instruments. It is easy to fall prey to an MCA. Afterall, once the business is denied conventional financing or cannot obtain an SBA loan, they are desperate and vulnerable to the non-stop barrage of cold caller sales people, offering easy and quick money.

The temptation of guaranteed same day financing is sometimes too strong to ignore for some merchants and they begin the slippery slide. The MCA industry is in fact designed to target and prey upon desperate small businesses, a common occurrence during economic downturns.

Through heavy spending and a massive focus on solicitation and marketing, primarily via robotic cold calling performed by sales people known in the industry as ISO’s (Independent Sales Organizations) these people call and call the merchant business owner day after day offering “deals” for business financing that are highly tempting but more often than not non-existent. The ISO space is competitive and like the funders, no regulation exists governing a Merchant Cash Advance broker and thus it is no wonder the Merchant Cash Advance industry has seen consistent and rapid growth year over year.

This begs the obvious question, what exactly is a Merchant Cash Advance?

To assist with the answer, imagine Factoring or perhaps a Business Pay-Day Loan. In an MCA a lender, referred to as a funder, will provide a small business with a lump sum of cash for the right (not guarantee) to receive a percentage of the Merchants future generated accounts receivables. The amount received by the funder in return is usually in excess of 100% when calculated as an APR.

Amazingly, the law currently permits this transaction and the difference between the lump sum given and the receipts received by the funder, represents arbitrage or a spread and not interest!

In other words, the law holds that provided the funding transaction is one of purchasing future receivables, it is not a loan. If it is not a loan it is not governed by usury, if there is no usury the MCA funder is free to charge what the small business whatever it so desires. This legal nuance is what permits an MCA from receiving what ordinarily would be deemed usurious interest, thereby allowing for the absurd and astronomical amounts of money required to be repaid by a small business to an MCA funder.

With such a landscape at hand, there can no wonder at the sheer number of new lenders that has emerged. The barrier to entry to become an MCA lender or ISO is so minimal, it does not sway would be fraudsters and thus anyone can become a funder or MCA ISO. The lack of licensing, background checks, regulation and disclosures has made the Merchant Cash Advance a predatory lenders favorite instrument. Where else can an investor receive an Annual Percentage Rate (APR) that exceeds 500% and for it to be legal? Merchant Cash Advances is now the number one safe haven for predatory lenders to churn their funds.

What are the practical differences between a loan and a Merchant Cash Advance?

A traditional loan is repayable absolutely and gives no contingencies to the borrowing company to not pay. On the other hand, a true Merchant Cash Advance is NOT repayable absolutely and thus there are circumstances where the money provided by the Merchant Cash Advance funder is not repayable.

Even more stark is the difference when it comes to interest payments. Pursuant to State regulations, a lender cannot charge interest that exceeds State usury laws. In New York for example, the charging of interest in excess of 25%, when calculated as an APR, is illegal and considered criminal usury. However, the same law holds that if the funding instrument is structured and called a Merchant Cash Advance and refers to the transaction and the contract as the “purchase of the borrower’s future receivables.” there is no interest cap.

This is because at present the law holds that the purchase of future receivables,  at a discount, is not considered a loan. If the instrument used to finance the business is not recognized as a loan by the law, the buyer of the receivables (lender) can ask for a payback number of future receivables that ordinarily would breach usury, when calculated as an APR. Moreover, an MCA payback is usually structured to be automatically debited from the Merchants account on a daily basis. Double dipping and unauthorized debits are par for the course and often these unscrupulous parties get away with these frauds.

With no interest cap to be concerned about, seemingly endless profits available, coupled with a dearth of regulation and no barriers to entry and an entire industry was born resulting in what we know today as a Merchant Cash Advance.

As previously stated, the MCA concept, while relatively new to small business in 2010 was in fact “invented” at least a decade earlier. Twenty-Three (23) years ago information about Merchant Cash Advance loans became available and publicly accessible. Specifically, an individual by the name of Barbara S. Johnson is listed as the official inventor of split-funding, a system that allows for automatic splitting of funds received by credit card, with some going to the MCA funder and the remainder to the Merchant. This act of repayment to an MCA funder from a single credit card processor lay the grounds for Merchant Cash Advance.

Ms. Johnson obtained a Patent for this system in 1997. Johnson was running four Gymboree Playgroup & Music franchises. Unable to get working capital to fund a summer marketing campaign, she wondered whether she could borrow against future credit card sales derived from parents bringing their kids back for fall classes. About a year later, Johnson and her husband founded Advance Me, an MCA Funder. Later her company would become CAN Capital.

As with most new markets, regulation has simply been unable to keep up with the revolutionary MCA industry, its trends and has failed for the most part to reign in abuses. Accordingly, the MCA market developed into one more akin to the Wild West.

There is a fortune of money to be made in the industry and this means constant innovation and the introduction of certain methodologies by funders for making even more money off a drowning merchant.

Like most money-making bonanzas, the abusers have created systematic practices designed to drain the merchant of all revenues and hold the merchant hostage in the event the business cannot afford to make the repayments. Such practices include but are not limited to having repayments set on auto debit and on a daily basis. The use of ACH. Lock boxes. Complete access to a Merchants bank accounts. Personal Guarantees. Absolute Power of Attorney. Cross collateralization of entities and assets unrelated to the borrowing entity. Security Agreements with promises to repay irrespective of the facts. Liens filed against a small business bank account and even the merchant’s personal accounts. The illegal use of a Confession of Judgments (COJ) a legal tool whereby the funder obtains a judgment without having to litigate. 30% attorney’s fees. Permission for the funder to visit the borrowing Merchant at its place of business in the event of default. Predatory usurious lending rates. Illegal collection activities.

Excessive Origination Fees. Excessive Underwriting Fees. Excessive broker commissions. Illegal collection methods. Harassment, double dipping and debiting without authorization to name but a few of the more common schemes.

Unfortunately, instead of increasing scrutiny and introducing legislation, all that the last decade has done is allowed the market to grow unregulated. Even the so called pristine are involved. Several publicly traded companies are entering the world of Small Business Lending or Merchant Cash Advance. In fact, prestigious investment banks like Morgan Stanley have invested money with some of the largest MCA lenders and more investors want in. Where else can you charge 100, 200 or even 1000% interest on your money and have the law call it legal?

Moreover, large credit card processors such as Square, PayPal and Stripe are offering Merchant Cash Advance today add in Shopify and now even Amazon has got into the MCA lending space. With their merchant’s data readily available, it is particularly worrisome that conglomerate players such as this are involved too.

What about usury? Most States have usury laws on their books that set the maximum amount of interest you can charge on a loan. This number may vary depending on State, for example; California, Texas, New York, Florida, Michigan, Pennsylvania, Illinois, Tennessee, Ohio, New Jersey, Georgia, Arizona, North Carolina, Massachusetts, Indiana and Missouri all permit Merchant Cash Advance loans but also have usury laws on their books.

However, as delineated above, the law holds that usury applies to a loan – i.e. to borrowed money and not to an MCA that it considers to be the purchasing of a percentage of the merchant’s future revenues, and therefore usury will generally not defeat a bona fide MCA, since the MCA is not subject to usury caps.

It is imperative that legislation be passed to provide more protections to borrowers. Thankfully New York is on the cusp. SB 5740 was passed in 2021 and is expected to take effect in mid-2022. California has similar legislation on its books to New York.

Humbly, I believe the Courts also have a critical role to play in the fight against predatory lending abuses and it is hoped that more of the abusive Merchant Cash Advance be found to be loans merely in the guise of an MCA. As institutions of equity and fairness, refuge, and justice for all, the Courts must go beyond the mere label on the financing documents.

Just because the document says Merchant Cash Advance or Purchase of Future Receivables, does not automatically make the instrument a bona fide Merchant Cash Advance. Rather, the actions of the funder must be analyzed and the particular facts examined to determine whether the matter is a loan or a legal MCA. Unfortunately, without the guard of usury, small business owners are sitting ducks for predatory lenders.

The industry is crying out for regulation, laws and accountability. Until this happens we must challenge the funders. Challenge their contracts. Challenge their fees. Challenge the actual APR. Challenge their abusive practices and illegal collection tactics and end this “non-loan” sham.

If it looks like a loan, acts like a loan, requires a pay back and has the hallmarks of a loan, it should be treated as one. Simply calling it a receivable purchase in the contract is not enough indicia of a bona fide MCA.

Someone needs to stand up for small business. Better yet, new and transparent methods of merchant lending must be created. Too many businesses have been forced to shut or file bankruptcy because of these insidious loans. It is our hope that SB 5740 when enacted, will address many of the current abuses taking place in the MCA world.

With many Court opinions stating an MCA is essentially legal, is there a way to challenge, settle or legally fight a Merchant Cash Advance?

The answer is an emphatic yes! Seeking assistance when struggling to repay the MCA is your right and it should be taken. You must be allowed to restructure the MCA and if need be to challenge any abuses. Contact a Merchant Cash Advance Attorney. By working with a Merchant Cash Advance law firm and attorney, you will have the benefit of experience and knowledge of the law at your side.

You will know your rights and more importantly you will know what can be done to end daily ACH payments, stop illegal collection efforts and have your MCA loan settled.

The attorneys at Grant Phillips Law, PLLC are experts in the practice of Settling, Litigating and if applicable Terminating a Merchant Cash Advance. We stand shoulder to shoulder with our clients. Our long-term goal is to see the industry regulated and the players vetted, have interest rates capped and the adoption of a uniform MCA contract with standard terms and conditions and a cap on fees.

Our law firm serves clients across the United States. You do not need to be a resident of New York to receive our law firm’s assistance.

The attorneys at Grant Phillips Law, PLLC have assisted hundreds of Merchants with their Merchant Cash Advance Loans in most States, including but not limited to: California, Texas, New York, Florida, Michigan, Pennsylvania, Illinois, Tennessee, Ohio, New Jersey, Georgia, Arizona, North Carolina, Massachusetts, Indiana, Missouri and all across the United States.

516.670.5165 or speak with someone 24/7 via the Live Chat on our website at www.grantphillipslaw.com

New York MCA Laws Updated

New York’s Commercial Financing Disclosure Law SB 5740
UPDATED AND CLARIFIED

NEW REGULATION GOVERNING MERCHANT CASH ADVANCE POSITIONS IN THE STATE OF NEW YORK

June 2, 2021

SB 5740 is New York State’s new law (commencing January 1st, 2021), requiring non-conventional lenders, including funders of Merchant Cash

Advance, to make certain disclosures in the contract paperwork, available for a small business borrower to make informed borrowing decisions. Examples of required disclosures include revealing the total cost of financing as well as presenting the small business borrower with a defined APR (Annual Percentage Rate).

SB 5740 applies to Merchant Cash Advance. In fact, New York law writers took the time to list a Merchant Cash Advance as one kind of non-bank lending the Statute is designed to govern.

For more information and context surrounding SB 5740 and its disclosure requirements, please see our first article in this series titled: “New York Passes Merchant Cash Advance Regulation Requiring Transparency & Disclosures”

WHY WAS SB 898 PASSED INTO LAW IN NEW YORK?

On February 16th, 2021 New York Governor Cuomo signed SB 898 into New York Law.

SB 898 is a Statute specifically created to provide clarity and further scope surrounding the passing of another Statute, SB 5740.

New York law SB 5740 is designed to create transparency around loans originated in the State of New York and provided to small businesses via unconventional non-bank lenders, SB 5740 passed in December of 2020.

On its own, SB 5740 reads somewhat ambiguous, with limited reach. Comes along SB 898 (about two months after SB 5740 passed) providing more context into SB 5740 while simultaneously increasing its regulatory reach.

Summarized SB 5740 requires non-bank New York lenders to provide certain disclosures about the terms of a loan it provides to small business borrowers from around the United States.

We delved into and analyzed all of SB 5740 in the first article in this series. There we raised certain questions, more specifically as to SB 5740 and its

implementation, enforcement, and protocol for compliance. The intent of SB 898 as passed by the New York Legislature is to answer some of these questions and to provide SB 5740 with a far broader reach to include more loan transactions within its purview and includes Merchant Cash Advance transactions.

WHAT IS UPDATED IN THE NEW LAW?

Commencement

SB 5740 will go into effect as law on January 1st, 2022.

Compliance with SB 5740 Doesn’t Make the Loan Legal

SB 898 includes language that states categorically that a lender’s compliance with SB 5740 does not mean the underlying loan transaction is therefore legal. Put another way, the new law of SB 5740 does not give a non-bank lender a pass. Fraud is still fraud. Misrepresentation is still misrepresentation and thus even total compliance with the SB 5740 disclosures will not waive fraudulent or legally questionable transactions. SB 5740 does not make illegal transactions suddenly legal.

Increased Powers Provided to NY Dept. of Financial Services:

SB 898 continues and provides The New York Department of Financial Services additional power for seeking restitution for victims of fraud.

Licensing Still Required

SB 898 further clarifies SB 5740 by stating compliance does not remove the requirement for proper and adequate licensing as required.

Compliance with SB 5740 Does Not Cure Usury

SB 898 continues its explanation of SB 5740 stating categorically that mere compliance with SB 5740 will not cure a breach of New York Usury Laws. Thus, a breach of usury remains usurious and compliance with SB 5740 will not cure such usury.

SB 5740 Applies to All Commercial Loans Under $2.5MM

Originally, SB 5740 governed loans of less than $500,000.00. Now, as amended by SB 898, the law applies to commercial lending transactions, including Merchant Cash Advance, of less than $2,500,000.00.

Thus, expanding the Statutes reach. It is worth noting that under New York Usury laws, the charging of interest in excess of 25% on a loan less than $2,500,000.00 is considered criminal usury. Ostensibly now, non-conventional loans under $2.5MM in New York are subject to both SB 5740 and to New York criminal usury.

One little quirk exists though, what if the loan is for exactly $2,500,000.00? The law would seem to point to the fact that a transaction in the exact amount of $2.5MM is still governed by SB 5740, but not governed any longer under criminal usury since in New York criminal usury is capped at $2,499,999.00

Exemption For Fellow Car Dealerships

S.B. 898 explains that a car dealer is exempt from the disclosure requirements of SB 5740 provided the recipient of the financing is also a car dealer or a car rental company and where their dealings lead to a transaction that exceeds $50,000.00.

APR Calculation Further Explained

SB 898 instructs that an APR (annual percentage rate) must be calculated in accordance with the Truth in Lending Act (TILA) as applied on a federal level and in accordance with Regulation Z. Interestingly, Regulation Z is a law that protects consumers from misleading information when applying for credit. SB 898 goes even further by stating that this calculation method is required regardless of whether the underlying transaction requires federal-TILA like disclosures or Regulation Z. In any event SB 5740 applies requiring this calculation for the transaction at issue. This is an important distinction for it is saying that TILA and Regulation Z apply equally to business borrowers as it does to consumer borrowers and hence any argument or debate to the contrary is null and void.

AUTHOR

Grant Phillips, Esq. – Founder and Managing Partner at Grant Phillips Law, PLLC

CONTACT THE AUTHOR:

For questions related to this article, kindly contact the author, Mr. Grant Phillips, Managing Partner at Grant Phillips Law, PLLC, a New York Law Firm specializing in representing Merchants across the United States struggling with a Merchant Cash Advance.

Grant can be reached at mailto:info@grantphillipslaw.com or at 516.670.5165. Please visit our website for additional resources and information.

Grant Phillips Law, PLLC is an MCA Law Firm based in New York City with clients across the United States. We represent Merchants struggling with Merchant Cash Advances.

“A Merchant Oriented Law Firm.”

www.grantphillipslaw.com

516.670.5165

New York Enacts APR Disclosure Laws

NEW YORK PASSES

MERCHANT CASH

ADVANCE REGULATION

COMMENCING – JANUARY 1st  2022

“New York State Adopts Truth In Lending (TILA) – Like Disclosure Law for Business Loans, including Merchant Cash Advance and Purchase of Future Receivables.”

The Birth of S.B 5470

On December 23rd of 2020, New York State Governor Andrew Cuomo signed Senate Bill 5470 or S.B. 5470 into law.

https://www.nysenate.gov/legislation/bills/2019/s5470

What is S.B 5470?

S.B. 5470 is a New York law requiring non-bank lenders to provide corporate borrowers specific disclosures in the loan paperwork and prior to formal

consummation of the loan. The law was enacted in order to create more transparency for small business borrowers surrounding their application for credit from non-conventional banking institutes.

What is the Intent of the New Law?

The intent of S.B 5470 is to provide corporate and small business borrowers with more transparency surrounding their taking of credit, in order to allow for better, more informed decisions, a clearer understanding of how much is being borrowed and under what terms and to provide a corporate borrower with the ability to compare different offers of credit.

Does it apply to a Merchant Cash Advance?

Yes. The newly enacted law specifically names a Merchant Cash Advance as one specific form of corporate financing that S.B. 5470 governs.

It’s About Disclosure and Transparency

The new law imposes multiple disclosure requirements similar to TILA (Truth in Lending), on funders and providers of corporate financing including Fintech, Factors, and Merchant Cash Advance transactions.

Prior to enactment, there was no uniform methodology for the disclosure of vital components of the credit being extended to businesses, such as the total amount being borrowed, the total amount of repayment, the total interest cost, annual percentage rate, and a host of other disclosures, to be discussed later in this article.

Now, however, S.B 5470 provides certain protection for corporate borrowers, by virtue of the mandatory disclosure requirements it places on funders and providers of corporate financing when such financing is less than $500,000.00.

When does S.B. 5470 Commence?

The new TILA-like Disclosure requirements were signed into law on December 23rd of 2020 with an original commencement date of June 21, 2021. However, since passing S.B. 5470 the New York Senate has provided additional guidance and updates (In March 2021), and included in this update is a new date for commencement of the law to begin January 1st, 2022.

Whom does S.B 5470 Govern?

The Disclosure Law applies to non-exempt “providers” of “commercial financing.” This definition will be expanded upon further into this article.

What are the Keys to S.B. 5470?

To be compliant with New York’s S.B 5470 Disclosure Laws, providers of corporate finance that is less than $500,000.00, such funders and providers must:

1. Disclose Key Transaction Terms to corporate borrowers and;
2. Obtain the Borrower’s Signature prior to Consummating a Transaction.

How will the new law be governed and monitored?

The protocol and format of how lenders will issue, maintain and comply with the new law and the manner by which lenders will be monitored, will be prescribed by

The New York Department of Financial Services (DFS). At the time of writing this article, the DFS has yet to issue guidance or provide instruction on Format and Compliance.

Ground Breaking Protections for Corporate Borrowers.

Notwithstanding the lack of DFS guidance thus far, the law is categorical in its underlying intent and drive. New York is looking out for small businesses at home and across the country. S.B 5470 is groundbreaking in so far as it mandates that certain disclosures be provided to corporate borrowers, thereby providing a corporate borrower with protection from lending abuses perpetrated on small businesses and merchants across the United States.

New York Joins California in Passing Disclosure Law.

New York follows the State of California by enacting this type of law and like California, New York’s newly enacted statute applies to a Merchant Cash Advance.

Like California, New York is trying to clean up its reputation as the bedrock and home of most Merchant Cash Advance, Confessions of Judgments, and other predatory loan type scams. New York State has spoken. It is standing up and telling providers and lenders of credit to businesses, to disclose critical terms and to be transparent and accurate or face consequences.

What is the Protocol for S.B 5470?

While S.B. 5470 is yet to commence, questions arise. More specifically, questions about protocol and details about the mechanics of how, where, and when to disclose exist. While details such as these remain outstanding, the law is nevertheless a massive win for small businesses and record-setting by virtue of the existence of a law that provides protection to small businesses against lending abuses.

From Conversation to Law

The law is not a finished product. However, it makes tremendous strides in curbing predatory and corporate lending abuses. Prior to enactment, issues of predatory lending, for example with a Merchant Cash Advance, were merely part of the discussion. Now there is the law. S.B. 5470 governs providers and funders of credit to small businesses, including Merchant Cash Advance arrangements and other forms of agreements for the purchase of future receivables and by requiring such lenders to comply with the S.B. 5470 disclosure requirements, a merchant and corporate borrower are afforded real legal protection.

Can S.B. 5470 Catch Up to Fiscal Invention?

Perhaps. Time will tell. With the advent of financial technology, providers and lenders of corporate finance have become more sophisticated and continually seek to “invent” new and complex lending structures that bad actors can use to engage in predatory and lending abuses. S.B 5470 seeks to govern these creations and inventions by requiring the disclosures delineated in more detail further into this article.

New York Protecting Small Business

The New York Truth in Lending/TILA Disclosure Law, shows a clear and unambiguous intent on the part of the New York Legislature. No more predatory loans! Not here. This directive includes its chief protagonist, namely the infamous Merchant Cash Advance. New York has begun to regulate the Merchant Cash Advance industry and together with California, provides fiscal protection to corporations and businesses (Emphasis added).

S.B. 5470 goes a long way to right potential corporate lending abuses. It educates the merchant borrower, allowing for an informed and educated decision when shopping for a business loan, by forcing providers and lenders of corporate credit to disclosure material information and will expand to govern future potential lending abuses as more transaction types fall within the ambit of the law.

Will S.B. 5470 Eliminate All Corporate Lending Abuses?

Don’t expect the law to eradicate all corporate lending abuse, however. We expect to continue to see certain illegalities and abuses such as the inclusion of a Confession of Judgment or other illegal documents in Merchant Cash Advance lending packets and other parts of the Merchant Cash Advance contract with possible illegal clauses, notwithstanding the new laws. Unfortunately, human greed cannot be regulated absolutely.

However, regulation will bring uniform standards and better choices for borrowers, eradicating many Merchant Cash Advance scams and revealing those transactions which in fact and law are loans merely discussed as an MCA.

Is a Merchant Cash Advance Legal?

Provided certain disclosures are met pursuant to S.B. 5470 and that risk to changes in receivables are carried and borne entirely by the lender, coupled with several other legal criteria (the specifics of which are not applicable for this article), and it is possible for a bona fide Merchant Cash Advance, (i.e. in compliance with all laws) to exist.

How can Charging Interest Exceeding 100%+ be Legal?

The world of Merchant Cash Advance is one of ambiguity, deceit, and “invented” to deliberately extract the maximum amount of interest, fees, commissions, and charges possible from small businesses.

To qualify one need only show three (3)

months of corporate bank statements that reflect some inflow of revenue. That is pretty much the qualification. There are no true underwriting standards or uniform qualification process. Rather do you own a business and does it have enough revenue to pay the lender their usurious interest over a very finite and short period of time? If yes, well done, you qualify.

What about Usury?

How can Merchant Cash Advance lenders charge corporate borrowers what they do? The Courts have held a Merchant Cash Advance (a real MCA) i.e. the purchase of future receivables is not a loan.

Why is an MCA Not a Loan?

In order to be a loan, money must be given and repaid no matter what. With a legal Merchant Cash Advance, Courts hold that the money received by the corporate borrower is not being loaned but is rather money provided today for the rights to receive a massive chunk of the corporation’s future receivables. The difference when calculated as an APR will often exceed 100 to 350%. Nevertheless, the law in New York says that the true purchase of receivables is a financial structure that the law does not recognize as a loan. Since a bona fide MCA structure is not recognized by the law as a loan, it is not deemed to be a loan and thus not governed by usury and hence the massive amounts of interest/repayment.

Little Nuance – Massive Destruction

This little nuance has caused the destruction of thousands upon thousands of small American businesses of all kinds. Tragically, Merchant Cash Advances have been solely responsible for the destruction of thousands of businesses across the

The United States by virtue of the arduous and overbearing repayments demanded on a daily basis, causing many businesses to lose revenue and ultimately their businesses.

With an MCA, not a loan, bad acting MCA lenders are afforded a loophole whereby the charging of criminal usury is “permitted,” by simply calling the contract an agreement for the purchasing of future receivables, despite their treating the MCA exactly like a conventional loan that is repayable absolutely without contingency.

S.B. 5470 is not a panacea.

What happens when a Merchant cannot keep up with daily or weekly ACH payments? What happens if a Merchant Defaults on a Merchant Cash Advance that lacked the necessary disclosures? What happens if the business is destroyed due to an illegal loan, merely disguised as a receivable purchase? Will the new law prevent all abuses? Unlikely.

However, it’s a massive step in the right direction, and the fact that S.B. 5470 specifically names Merchant Cash Advances and Purchase of Future Receivable Agreements in the list of commercial financing structures it governs, is comforting. New York is making progress in its fight against predatory lending and illegal Merchant Cash advances. First the repeal of a Confession of Judgments (August 31, 2019) and now S.B 5470. This is real progress.

One of the most remarkable components of S.B.5470 is its

disclosure requirement of an ANNUAL PERCENTAGE RATE

(“APR”)

Why the New Law?

In 2019, after a massive media depiction of the abuses of Confessions of Judgments by Merchant Cash Advance funders in the State of New York, COJ’s were prohibited from being used against a non-New York resident as of August 31st, 2019. Notwithstanding these changes, abuses by predatory lenders have continued unabated, thereby forcing the New York State Senate to impose the New TILA-like Disclosure Laws. In a Merchant Cash Advance, a merchant borrower must try and decipher fifteen (15) plus pages of fine print that contain complex, ambiguous and possible life changing clauses and conditions, designed to maximize profit and simultaneously hide the actual cost of financing. The new law goes beyond the repeal of Confession of Judgments. The disclosures will be uniform and clear. Hopefully painting a clear picture for the merchant borrower of how much is being paid, what the APR is, when it is being paid and other vital components making up a Merchant Cash Advance.

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S.B.5470 EXPLAINED IN DEPTH

REGULATION:

On December 23rd of 2020, the State of New York enacted and Governor Cuomo signed S.B. 5470 into law. S.B 5470 forces funders and providers of commercial and corporate financing, including Merchant Cash Advance and Factoring Agreements to Disclose Key Terms pertaining to the contemplated financing and obtain the borrower’s signature, before the transaction is consummated. The

disclosure requirements apply to all forms of corporate financing, loans, and Merchant Cash Advance that are for $500,000.00 or less.

SIMILAR CALIFORNIA LAW:

In 2018, the State of California enacted a very similar disclosure requirement for commercial financing whereby such arrangements require multiple disclosures related to the contemplated financing. It is interesting to note that since enactment, the California version has undergone multiple amendments all in the name of clarification, and thus one can expect the same to take place with the New York version.

Please note, while similar, the New York and California TILA-like Disclosure Requirements do differ somewhat.

However, the idea and intent behind both the New York and California laws is disclosure! In other words, both States require specific disclosure of certain terms pertaining to the proposed financing and loan provided for by a corporate-financier/lender/funder/provider and or purchaser of future receivables. The law clearly governs commercial and corporate financing and does not apply to consumer or individual loans. The disclosure requirements contained in S.B 5470 mirror some disclosures contained in the Truth in Lending Act (TILA) – a Federal Disclosure Law.

POSSIBLE AMENDMENTS TO THE NEW LAW:

While not stated categorically, the New York Governor did hint at possible changes to the law as written. In a note filed together with the proposed law, Governor Cuomo stated that he “secured an agreement with the New York Legislature,” to make certain technical changes to the new law in order to “better provide clarity and align to existing requirements under Federal Laws, including the Truth in Lending Act.”

No one knows at this time what, if any changes or amendments will be made to the law during the 2021 legislative session. It is important to keep in touch with your legal advisor and Merchant Cash Advance Defense Attorney to determine such changes and what effect they will have on your commercial loans and MCA’s.

The new law will formally take effect on the 21st day of June 2021 and will govern non-exempt “providers” of “commercial financing” forcing them to disclose critical terms related to the contemplated financing transaction and obtain the borrower’s signature prior to completing a transaction.

WHO MUST COMPLY WITH THE NEW LAW?

S.B. 5470 demands that providers of commercial financing provide specific disclosures to borrowers at the same time they present an offer of financing. As stated previously, the manner by which to disclose these financing terms and the format to use, is to be arranged and enacted by the New York Department of Financial Services.

WHAT IS COMMERCIAL FINANCING UNDER THE NEW LAW?

Commercial Financing–

meaning: open-end financing, closed-end financing, sales-based financing, factoring transaction, or other forms of financing, the proceeds of which the recipient does not intend to use primarily for personal, family, or household purposes. For purposes of determining whether financing is commercial financing, the provider may rely on any statement of intended purposes by the recipient of the financing.

The Statement may be a separate statement signed by the recipient; may be contained in the financing application, financing agreement, or other document signed or consented to by the recipient, or may be provided orally by the recipient so long as

it is documented in the recipient’s application file by the provider. Electronic signatures and consents are valid for this purpose.

Please note: The provider of financing is not required to determine whether the proceeds of commercial financing are in fact used in accordance with the recipient’s statement of intended purposes.

S.B 5470 further defines “commercial financing” to include providers as well as third-party solicitors of:

Sales-Based-Financing–

meaning: a financial transaction repaid by the borrower to the provider/lender, over a period of time, where repayment is in the form of a percentage of receivables/revenues and where said repayment amount may decrease or increase based on actual receivables/revenues of the borrower, See N.Y. Financial Services § 801(j). Sales-Based-Financing also includes loan structures where repayment is a fixed amount but includes provision for a reconciliation of the repayment amount, whereby the reconciliation adjusts the payment to a percentage of actual revenue. Accordingly, S.B 5470 applies to Merchant Cash Advances.

Factoring Agreements–

meaning: a financial transaction tied to the revenues and receivables that includes an agreement to purchase, transfer, or sell a legally enforceable claim for payment held by a recipient for goods the recipient has supplied or services the recipient has rendered that have been ordered but for which payment has not yet been made, See N.Y. Financial Services § 801(a).

Open-End Commercial Financing–

meaning: an agreement for one or more extensions of open-end credit, secured or unsecured, the proceeds of which the recipient does not intend to use primarily for personal, family, or household purposes.

Open-end financing includes credit extended by a provider under a plan in which: (i) the provider reasonably contemplates repeated transactions; (ii) the provider may impose a finance charge from time to time on an outstanding unpaid balance; and (iii) the amount of credit that may be extended to the recipient during the term of the plan is generally made available to the extent that any outstanding balance is repaid, See N.Y. Financial Services § 801(c).

Closed-End Commercial Financing–

meaning: a closed-end extension of credit, secured or unsecured, including equipment financing that does not meet the definition of a lease under section 2-A-103 of the uniform commercial code, the proceeds of which the recipient does not intend to use primarily for personal, family, or household purposes. Closed-end financing includes financing with an established principal amount and duration. See N.Y Financial Services § 801(d).

Other Forms of Commercial Financing–

meaning: any other form of commercial financing as determined by the New York Dept. of Financial Services.

WHO IS A RECIPIENT UNDER THE NEW LAW?

A person who applies for commercial financing and is made a specific offer of commercial financing by a provider. A recipient may also be an authorized representative of the recipient/borrower. Please note, a person acting as a broker cannot be a recipient.

For more details, See N.Y. Financial Services § 801(i) – defining a “recipient” as a “person” and later, See N.Y. Financial Services § 801(g) – defining a “person” as “an individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust or unincorporated organization including, but

not limited to, a sole proprietorship”). Accordingly, “Recipient” includes both individuals and Corporations.

WHO IS A PROVIDER UNDER THE NEW DISCLOSURE LAW?

As one can see, S.B. 5470 defines “Commercial Financing” broadly and INCLUDES PURCHASES OF FUTURE ACCOUNT RECEIVABLES as well as factoring arrangements.

Accordingly, despite several of the required disclosures being difficult to apply to a typical Merchant Cash Advance (to be discussed further in this article), the fact remains that S.B. 5470 applies to a Merchant Cash Advance and thus, an MCA that is for $500,000.00 or less, will require the disclosures, pursuant to the newly passed law.

WHO DOES THE NEW LAW TARGET?

S.B. 5470 applies broadly to entities that “extend” specific offers of commercial financing or that “solicit and present” specific offers of commercial financing on behalf of a third party. This language indicates a clear intention on the part of New York lawmakers to include Merchant Cash Advance Companies Merchant Cash Advance Lenders, Merchant Cash Advance Providers as well as Lending Platforms, Peer to Peer Lending Platforms as well as other forms of Marketplace Loans.

Interestingly the law counts Bank Strategic Partnerships within its reach. This means that the New York – Truth in Lending-like newly passed Disclosure Law applies to Merchant Cash Advance Companies that partner with Federally Chartered Banks. For example, Merchant Cash Advance Lender X partners up with Bank Y to

offer loans and MCA’s to small businesses across the United States. X has the clientele and Y has the capital. No matter. Both Merchant Cash Provider/Funder X and Bank Y are within the ambit of the new Disclosure Law alike.

Notwithstanding this, S.B. 5470 does not seek to stifle or prevent such arrangements, rather the Statute takes the time to express its support for the notion of a so-called “True Lender.” Meaning, if Bank Y is a True Bank Lender and also has a relationship with a Merchant Cash Advance Funder, the mere relationship or the mere fact that their relationship engages in transactions that likely fall within the scope of the Statute, requiring disclosures, does not, therefore, mean that the bank or its Merchant Cash Advance strategic partner are necessarily providing commercial financing.

More specifically it states; “For the avoidance of doubt, the extension of a specific offer or provision of disclosures for a commercial financing, in and of itself, shall not be construed to mean that a provider is originating, making, funding or providing commercial financing.”

Fintech companies are also within the scope of the new Financial Disclosure Law. A good rule of thumb is to ask whether the institution and or the commercial financing transaction contemplated, or both, are somehow exempt from the new Statute. Unless the Lender, Bank, MCA Funder, MCA Provider, MCA Platform, and or Fintech Company is exempt from providing the borrowing Merchant certain disclosures, pursuant to the new law (to be discussed further in this article), the entity and contemplated transaction is governed by the new law and those entities must comply by providing the necessary and required disclosures. For further detail, see N.Y. Financial Services § 801(h) – defining a “provider” to be “a person who extends a specific offer of commercial financing to a recipient.

Important: Unless an exemption exists, “provider” also includes “a person who solicits and presents specific offers of commercial financing on behalf of a third party.”

COMMERCIAL MORTGAGES ARE EXEMPT:

S.B. 5470 exempts Commercial Mortgage Loans. The statute does not impose new interest charging caps or pre-lending licensing obligations on Commercial Mortgage Lenders.

Take Note: New York State Law does include the requirement to obtain formal licensing in order to

provide certain commercial loans. This is discussed in what is known as NY’s Licensed Lender Law. Unfortunately, though, the requirement applies to lenders issuing loans of $50,000 or less.

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DISCLOSURE AND SIGNATURE REQUIREMENTS (THE CORE LAW)

1. Lenders and providers of commercial financing governed by S.B.

5470 as analyzed above, will be required to disclose the following:

1. The total amount of commercial financing (or the total amount of available credit) and, if different, the disbursement amount;
2. The finance charge;
3. The Annual Percentage Rate (APR), calculated using TILA and Regulation Z;
4. The total repayment amount;
5. The term of the financing;
6. The amounts and frequency of payments;
7. A description of all other potential fees and charges;
8. A description of any prepayment charges; and
9. A description of any collateral requirements or security interests^.

Take Note: Additional forms of disclosures exist for Merchant Cash Advance, Factoring, and other forms of lending predicated upon the sale of future revenue and receivables.

MERCHANT CASH ADVANCE RENEWALS

Disclosure for a Loan Renewal: Providers and lenders requiring borrowers to pay off an existing commercial loan/commercial financing structure as a pre-condition to renewal, must disclose

1. The amount of new financing applied to prepayment charges or interest under the financing being renewed and
2. The dollar amount by which the new disbursement will be reduced to pay down any unpaid portion of the outstanding balance.

    This will apply to Merchant Cash Advance Consolidations too, including Reverse Consolidations as well as to a general renewal of an existing Merchant Cash Advance Positions.

APR OF A MERCHANT CASH ADVANCE?

The new disclosure law requires an APR or Annual Percentage Rate to be provided with each loan, pursuant to the statute.

HOW CAN AN MCA DISCLOSE AN APR?

Since a bona fide Merchant Cash Advance is not permitted to designate a definite deadline for repayment because the transaction, if done legitimately, is supposed to be premised solely on possible and potential future receivables, no one knows of the time it will take to make the receivables to be provided to the lender. No one knows what will happen in the future and receivables may not even exist moving

forward, a repayment timeline or deadline does not exist in a legal bona fide MCA and this begs the obvious question:

HOW TO CALCULATE AN MCA APR?

New York lawmakers seem aware of the potential issue raised above and have stated that a Merchant Cash Advance and other agreements to purchase future receivables or revenues, will require different or substitute disclosures.

The devil is in the details and those details may only be revealed post-enactment and probably will be tweaked on a preliminary case basis. Coupled with the pending issuance of guidance provided for by the Department of Financial Services in New York and it will be remarkably interesting to see how the Merchant Cash Advance and Purchase of Future Receivables space discloses its APR.

THE MILLION-DOLLAR QUESTION:

What exactly the “differing and or substitute” disclosures are and how they will be inculcated into the overall law, is still up in the air. Will it provide a mechanism by which a Merchant Cash can actually calculate and reveal its true APR? Only time will tell. The mere fact that the law demands it, makes this all the more remarkable! Watch this space.

EXEMPT ENTITIES OF NOTE:

Exempt entities include state or federally chartered institutions like banks and saving and loan companies.

EXEMPT LENDER / PROVIDERS OF NOTE:

An exemption also exists for a person or provider that facilitates/provides no more than five (5) commercial lending transactions within the State of New York, over the course of twelve (12) months.

EXEMPT TRANSACTIONS OF NOTE:

S.B. 5470 does not apply to lending transactions

1. Secured by real property,
2. Leases (See Article 2A – New York UCC) and
3. Individual loan transactions that exceed $500,000.00

EXPECTATIONS

S.B. 5470 will go into effect on January 1st, 2022. All non-exempt entities must be in compliance with the law’s disclosure and signature requirements at this time. As for Merchant Cash Advance and Purchase of Future Receivable agreements, we believe the New York Department of Financial Services will issue the Disclosure format and guidance before June 21st.

Alternatively and if necessary, the lawmakers may need to amend or enact additional laws as necessary to effectuate compliance with S.B 5470 – INCLUDING Merchant Cash Advance and Revenue-based Sales agreement. The worst outcome will be a delay in enacting the law for a lack of guidance on format and application.

S.B 5470 – THE RIGHT DIRECTION:

In conclusion, this writer believes the New York Law is a massive step in the right direction towards regulating Merchant Cash Advances and the Purchase of Future Receivables and although questions remain as to practical application and format, the possible benefits of S.B 5470 far outweigh any lingering questions. Practical compliance will come and players will adapt or fail.

The winner here is the small business owner. America’s small business community will be enabled with uniform data and parameters that create transparency and a fair marketplace while simultaneously holding non-compliant lenders accountable and even providing recourse to commercial borrowers via the regulatory and enforcement powers of the New York DFS.

As for the current marketplace, we expect it to self-correct as each respective lender decides to adapt to the new law. We see the law’s enactment and the speed at which it passed, as the beginning of a trend and expect additional States around the country to enact similar legislation to New York’s S.B 5470. Credible lenders will likely welcome the opportunity too as a means to separating the good actors from the bad.

Bottom line: S.B.5470 is here and it’s real. Compliance will be expected. Be sure your Merchant Cash Advance is legal and in compliance.

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Take note: This article is part 1 of 2. Be sure to read the second article following this. In article 2, we look at the guidance and amendments provided

and enacted since S.B. 5470 was signed into law.

CONTACT THE AUTHOR:

If you have any questions related to this article, kindly contact the author Mr. Grant Phillips, Managing Partner at Grant Phillips Law, PLLC, a New York City law firm specializing in representing Merchants struggling with Merchant Cash advances.

Grant can be reached at info@grantphillipslaw.com or at 516.670.5165. Please visit our website at grantphillipslaw.com for additional resources and information.

Grant Phillips Law, PLLC is a Merchant Cash Advance law firm based out of New York City with clients from across the United States. We represent Merchants struggling with an MCA.

grantphillipslaw.com

516.670.5165

Disclaimer: The article and your reading of it, are for informational purposes only and no attorney-client relationship exists by it and nothing contained within this article is intended or should be construed as or relied upon as legal advice.

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