In April, the Federal Trade Commission (FTC) announced a settlement with merchant cash advance (MCA) provider Yellowstone Capital and its founder for alleged unfair and deceptive practices in violation of the FTC Act. This case highlights the potential for enhanced regulatory scrutiny of MCAs, which may accelerate as a result of this settlement. In the meantime, if your business is struggling under the terms of a merchant cash advance, talk to an experienced debt relief specialist.
The Backdrop to the FTC Settlement with Yellowstone
The FTC filed a lawsuit against Yellowstone in August 2020 alleging that the company:
- Falsely advertised MCAs do not require collateral or personal guarantees
- Misrepresented the total amount of funding to be provided by failing to disclose that fees would be deducted from the financing
- Made unauthorized withdrawals from customer accounts after financing obligations had been satisfied
Under the terms of the settlement, the company is required to pay more than $9.8 million to the FTC to refund the affected businesses. The company is also permanently barred from making misrepresentations to customers about (1) the terms of financing, (2) fees, charges and the total amount to be repaid, (3) the total amount of the funds that will be provided, and (4) any other material facts related to the financing.
In addition, the company is required to clearly disclose:
- Any fees and charges
- The total amount of funds received will be reduced by fees
- The actual amount of the funding after fee deductions
- The total amount to be repaid
The settlement also bars the company from making authorized withdrawals from customer accounts. Finally, the company is required to implement monitoring procedures to ensure compliance with the settlement.
Why This Matters
Merchant cash advances provide small businesses with access to working capital when they are unable to tap traditional sources of funding, such as a bank loan. However, this alternative product typically contains onerous terms such as a personal guarantee and Confession of Judgment which could jeopardize the customer’s business and personal assets.
Because an MCA agreement is a purchase and sales contract (the funder advances the funds in exchange for a percentage of the business’s future credit card and debit card sales), an advance is not a loan. Therefore, these products are not covered by consumer lending laws. While questions remain as to whether the FTC has the legal authority to enforce the settlement with Yellowstone, it does indicate the potential for enhanced regulatory scrutiny of merchant cash advances.
Meanwhile, businesses that are at risk of defaulting on an MCA should look to the terms of the agreement, which should include a reconciliation provision that requires the funder to restructure the payment in the event of a receivables shortfall. Ultimately, the best way to protect your business and personal assets is to consult with the experienced debt relief specialists at ReconcileMyMCA.com.