Fraud Prevalence in the Merchant Cash Advance Brokers

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Fraud Prevalence in the Merchant Cash Advance Brokers

New Fraud Prevalence in the Merchant Cash Advance Lenders and Boutique Lenders

You are a smart businessperson, you have a great vision and you would like to change humanity. Deep down, you think you know something that other people don’t know. You see, you are not just a businessman, you are a pioneer, and you bring solutions to people’s problems. So you set up your small business that will hopefully, help you quit your day job in a year or less.

And then it hits you! Not enough capital, not enough money to run things. You need to borrow money. So you go ahead and start researching on the types of loans available for small businesses. And that is where you come across the merchant cash advance loan. This is easily the most trouble-free, easy-to-get small business loan in the market. Why?

  • It does not require you to have good credit
  • You can get it without business credit
  • You do not need collateral
  • Payment is pegged on future receivables
  • Very convenient
  • A blessing in disguise …

Need we go on about why the MCA is a godsend to the small business community in America?

But you are smart. You would like to save a dime whenever and wherever you can. So you start looking for ways on how to borrow a merchant cash advance loan, and not pay. And get away with it!

You have just become one more nightmare to the flourishing MCA lender market. But do you care?

Merchant Cash Advance, popularly called MCA is a type of alternative loan that many small businesses took to when banks tightened their loan-granting rules in regard to small businesses. It is an advance payment for a percentage of the future sales/receivables paid by debit and credit card.

You love it. It is, after all, a very noble idea because most of the small businesses do not have good credit that can warrant their creditworthiness.

Many gray zones in the merchant cash advance lenders arena

There are so many gray zones where the MCA is concerned. Is it a loan, or is it not? If it is not a loan, then what is it?

Consider New York where the law says that any loan that charges an interest of more than 25% is illegal, irrespective of who is borrowing the loan. Since an MCA funding attracts interest that puts it in the loan zone. However, the state of New York thinks otherwise.

So many gray areas come up because as much as the funder is giving a merchant money on account of the future receivables, they do not have a single name of a customer, and neither do they get the name of any receivable.

In most cases, if the matter gets to court, the merchant’s lawyers will argue that the loan is illegal usury because the charges for the loan will be more than 25 percent. The MCA lender will charge a small factor rate to cover their losses, including all other charges, which may not be disclosed in the agreement. However, the loan might also fail the usury check, and a judge could declare the agreement illegal.

Even the MCA agreement may not hold water

Even the MCA agreement may not hold water

To the detriment of the lender, there are so many holes in the agreement. For example, the agreement does not the name of the customers who are expected to pay in future. Even if it offers such details, it mostly fails to specify how the lender will collect the payment. In most cases though, there are no invoice or customer contact details changing hands.

According to the court in New York, if the borrower (merchant) is going to take the risk of their customers not paying, then that is a loan. If the lender takes the risk of the customers not paying, then that is not a loan. It is an advance against receivables.

One more thing that needs to be cleared is this: since the amount advanced a merchant is hinged on the future receivables, what if they do not perform? Is there a sort of personal guarantee on the part of the merchant to stand in and pay the loan all the same? Usually, there is, but still, this does not stop the merchants from defaulting and totally refusing to pay the loan.

One more gray area is that this cash advancement is against the future receivables and since no one knows about the future, well, then it is assumed, and rightly so that the receivables do not exist. Therefore, with the lending agreement hinged on this, it may well be declared illegal by the court, which could leave the lender at the mercy of the merchant and the question then would be: to pay or not to pay. The courts will most likely take the stand that the loan agreement is usurious and that even if it is intended to be one thing, it really is not that thing.

A case example

A few years ago, a money laundering crew hit out at merchant cash advance lenders in Massachusetts and over 5 years, they had attained more than $700,000 by fraud. The leader of the group, 47 year-old Susan Yerdon pleaded guilty to money laundering and was sentenced to three and a half to five years in prison. The local authorities had uncovered a scheme where Susan and other people defrauded merchant cash advance lenders using false invoice factoring and merchant cash advance schemes.

While many merchants are always looking for an opportunity to defraud merchant cash advance lenders, bloggers and tabloids mostly concentrate on the few instances when a merchant cash advance lender defrauds a small business. Today, there are so many cases of small businesses defrauding alternative lenders, almost driving them out of business.

Maybe you will do everything possible to get money. But if it’s illegal, it’s illegal. Every year, hundreds of cash lenders lose money to fraudster merchants. They lose money to people who falsify bank statements and other documents to get the cash advance. The falsified statements and documents make them qualified for loans, but the truth is that they are borrowing a loan that they cannot be able to pay back.

Some merchants do not even own a business. They just want to falsify records, books of account and bank statements, and as soon as they get whatever cash advance they needed, they skip and disappear for good. Many such cases are hardly reported.

Technology has made it easier to defraud merchant cash advance lenders. Sites have come up here fraudsters offer their services in the full glare of the law. For example, many fraudsters offer their services on Craigslist.

The kinds of services that they offer to differ, but most times, they will also go to the extent of coaching business people on how to forge bank statements or even modify other business records to increase their chances of getting the loan. On top of that, today, you can even buy a bogus bank statement on the internet for less than $10 dollars, fill everything electronically and use it to borrow a merchant cash advance.

Prevalence of fraud increases with high number of loan brokers

As a merchant, you probably use a broker to get you the MCA loan. This is proving to be another nightmare for the lenders. When the broker gets his commission, he is out of the picture and it is upon the lender to follow up on a ghost borrower who will probably never pay up. It has become increasingly hard to detect fake bank statements, but with more effort on the part of the lenders, this can be done.

Fraud has become so serious that attorneys advise the merchant cash advance lenders to treat each bank statement forwarded to them suspiciously, to the extent of asking the merchant to provide his/her username and password for the account to scrutinize it and see whether the merchant is telling the truth.

However, verifying bank account is one thing, actually, it is the first one of a long process or list of things that need to be looked into. It can be hard to pick out other things that would indicate that a merchant will not be in a position to pay the loan that they are borrowing.

Let’s assume that you have been several months behind on your rent. You can ask the landlord to lie on your behalf on the agreement that after you get the money, you will pay the outstanding rent arrears. This is a deal that the landlord would find hard to resist.

Another common type of fraud used by merchants is to instruct their bank not to pay any outstanding amounts per month. Yes, you just refuse to pay. Alternatively, you can decide to close the bank account and open a new account with a new bank.

However, the real fraud, the mother of all frauds is that you as the merchant do not want to pay. You may even go for debt consolidation services where the debt consolidator will call the lender and bully them into accepting lower monthly payments. This comes about with the intention of not paying.

Another type of fraud that merchant cash advance lenders face is when a merchant takes out a loan to use it to hire a bankruptcy attorney to help him file for bankruptcy. That then makes it impossible to be paid back as the court will hand the business over to a trustee to settle with the creditors.

What happens when fraud is discovered?

Because you were using falsified business records and bank statements when applying, and since the application of the merchant cash advance loans is done online, it is easy to get out of the implications.

Usually, many merchants just deny having ever applied for the loan. They will go as far as claiming that someone stole their identity and falsified records in order to take a loan in their name.

What happens when MCA lender takes defaulter to court?

What happens when MCA lender takes defaulter to court?

Merchant cash advance lenders would love to avoid this quagmire altogether. But in this business, it is almost inevitable.

In 2016, a New York Supreme Court Judge passed a ruling that offering to purchase the future receivables of a business, what is what the MCA loan is all about, is not giving a loan! In fact, the judge said that this does not even come close to a loan.

In this case, the merchant had taken out a “loan” on future receivables with the lender Platinum Rapid Funding Group. When the merchant was not able to pay, the plaintiff took the matter to court. However, the defendant would argue that the plaintiff had committed acts of criminal and civil usury.

The judge ruled that the purchase of future receivables is not usurious because it is not a loan and therefore, dismissed almost all of the defenses brought forth in argument by the defendant (the merchant).

This case alone should warn the recipients of merchant cash advance loans and other boutique loans that in most cases, the usury defense will not stand in court since it is assumed that if the lender is undertaking the risk of the future receivables not being paid, then the advanced amount is not legally considered a loan.

While this is one case, there have been many more. Most times, funders have been forced to compromise to accommodate merchants who did not want to pay the full amount per month as agreed. This means taking half-payments or even accepting delayed payments.

Funding a business that has since changed hands

One other way that funders lose their money is to find a business, which has since changed hands. In many cases, when a small business changes hands, the new owners or even the old owners, do not bother in renewing the details on websites and social media channels.

A fraudulent merchant could sell their business and then immediately afterward, apply for a merchant cash advance in the name of the business. When the merchant cash advance lenders do their due diligence online, the name of the former owner of the business appears in the website and other channels, and they are advanced the loan and then they run. In future, this leaves the lender at the risk of losing their money because the new business owners will be ignorant of the fact that the former owner borrowed money in the business name after it had changed hands.

The law agencies do not help merchant cash advance lenders much

law agencies do not help merchant cash advance lenders much

It is hard for the law agencies to pin any criminal offense on the fraudulent merchant. Usually, if it is just one case, the law enforcement agencies do not deploy resources to cover such. But if the same merchant has defrauded multiple merchant cash advance lenders, then that is perhaps enough to get them charged with money laundering.

Even then, getting the merchant charged is one thing. Getting a conviction is another. Thus, many of them just go free. Unless the funder can be able to trace the merchant’s assets and then file a civil action, most likely their money will be lost. Finding the assets of the merchant and then filing a civil action can get the lender a judgment which they can enforce and collect their debt owed.

In most cases, the ruling goes in their favor because most merchants do not care to appear in court. But if they should call the “bluff” and appear with a lawyer, they can claim usury and maybe force the lender into a compromise which means getting paid part of the money only, or getting delayed payments.


While it may look easy to take a merchant cash advance funding and refuse to pay or run, it is not advisable. Technology has made it hard to hide and anyway, who knows when you might need another loan? If you default, you will be surprised to find that smudge on your record many years later. You have also seen that the court might rule out usury, and judgment is not something that you want on your record.