Merchant Cash Advances are notorious throughout the country when it comes to small and medium business funding. Although we have frequently discussed how to defend against their collection tactics and the legal defenses available in protecting against cash advance companies in lawsuits, it is also important to discuss other tactics that the MCA companies employ. One of the least known parts of the merchant cash advance process is the role of brokers in reeling in business clients. Brokers are generally the middlemen who offer small and medium size businesses MCA’s often promising a completely different product than what the business receives. Clients have often told us that agreements that they sign with brokers state that the MCA that they are obtaining is in fact a loan. Brokers frequently promise much lower rates and payoffs than what the business ends up receiving and paying. Brokers are generously rewarded with a significant fee by merchant cash companies for finding businesses to take on cash advances. However, brokers are a useful tool for the MCA companies not only because they find the clients but because it allows MCA companies to try to insulate themselves away from liability when there is a problem by claiming that it was the broker who made false promises or the broker who has an improper agreement. We see this defense come up repeatedly in MCA litigation. It is hard to believe that the Merchant Cash lenders don’t know exactly what the brokers are telling business to lure them in and maybe even rewarding them for doing so.
An effective new approach may be to attack the brokers as a part of the whole Merchant Cash cycle. By including the broker in any counterclaims or lawsuits against MCA lenders, we would like to see the courts rule that there is in fact an agency relationship between the broker and MCA and that the MCA companies are in fact responsible for the broker, their agreements and their conduct. This is not a significant stretch by any means given the practical nature of their relationship. In fact, if a broker’s agreement clearly names a MCA a loan then there is no better evidence of usury as a defense in these lawsuits. We also believe that broker behavior can be deceptive from what our client’s have told us which is what leads to so many businesses taking one or more cash advances. The brokers are highly incentivized to bring in as much business as possible because of the lucrative commission that they receive so it is likely that they play fast and loose with the details when discussing the options with a business. If proof of deception exists then the defendant business may have strong counterclaims against the MCA.
It is possible that the more that State agencies learn about the role of brokers in the MCA world, the higher the likelihood that they pass some sort of regulation to protect businesses against this sort of behavior. We believe that cleaning up issues with brokers may make a big difference in the MCA industry. Hopefully it will make it clear for businesses to understand exactly what kind of funding product they are applying for and obtaining. In the meantime, we believe that it is critical for counsel representing business defendants to review the details of a broker’s interaction with the business when obtaining the MCA in order to potentially use the defenses and counterclaims discussed above in an action or counter-action against Merchant Cash Advance lenders.