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Merchant Cash Advance Agreements -- Are They Legal?

Under New York law, a loan that charges annual interest over 25% is illegal, even if the borrower is a corporation.

Merchant Cash Advance agreements are notorious for charging more than 25% interest. For the first time, a New York State Supreme Court Justice ruled, on a contested motion, that a Merchant Cash Advance agreement was a usurious loan. The Court voided a confession of judgment that was based on a Merchant Cash Advance agreement. See Merchant Funding. Representing the merchant-borrower: Amos Weinberg.

The lenders making Merchant Cash Advance agreements all try to mask their loan agreements as investments in your company's future receipts or receivables. The lenders know it's not true. They neither get the name of any receivable or customer of your company, nor any invoice. Your customer pays you just like before. The risk of your customer not paying is on you, not on the lender. The agreement fails to provide any means by which the lender can get delivery of any invoice or receivable or even the identity of any customer of yours. The illegal interest is masked by stating in the agreement a specified or purchased percentage under 25%. This percentage has nothing to do with the interest rate. It has nothing to do with anything because the merchant-borrower usually has to pay a fixed daily payment. The lender does not ask for the amount of your expenses so it has no idea what you can afford.

Courts have known for a long time that receivables funding agreements are a mask for usurious loans. It was held that if you, not the lender, bear the risk of your customer not paying, it’s a loan, not the purchase of receivables. Endico; O.P.M. A hundred years ago, the Supreme Court of the United States held that if you’re the one who has to collect from your customer, not the lender, it’s not the purchase of receivables but probably “devices to cover loans of money at usurious rates of interest.” Home Bond Co. 239 U.S. 568 [1916]. There’s no such thing as the purchase of future receivables, since they don’t even exist. Stathos. Courts have also known that simply saying that the agreement is one thing, or is intended to be something, does not make it so. Union Sq. Park; Butz. And courts have always recognized that a usurious loan agreement always has to hide its true self. Knickerbocker.


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