Small businesses that need capital, but which cannot otherwise qualify for loans through standard banking sources, often turn to merchant cash advance companies, which provide money to small businesses based on their current revenues.
The borrowers typically give access to their bank accounts for daily and weekly repayments. However, when those current revenues were affected by the COVID-19 pandemic, many borrowers found themselves targeted by lenders and their abusive collection tactics.
Many borrowing employers claim that even after their revenues vanished during COVID-19 shutdowns, the lenders kept withdrawing money and, in some cases, moved to freeze the borrowing employers' assets. Some borrowers claim the cash advance companies physically threatened, with violence and kidnapping, the borrowers and their families.
The Securities and Exchange Commission (SEC) and the Federal Trade Commission (FTC) are focusing on these lenders. Because the merchant cash advance companies are not banks, merchant cash advance companies have been subject only to few regulations.
Effective interest rates on the cash advance companies' advances can be astronomical, between 400 percent and 1,000 percent, in some cases. Officials investigating merchant cash advance companies say they are examining whether the funding arrangements should be subject to so-called usury caps and federal and state protections. Investigations and lawsuits are being filed.
The merchant cash advance business has been in growth mode since the 2007-2008 financial crisis when major banks began cutting back on small business loans. Stepping in to fill the void, merchant cash advance companies provided an estimated $19 billion in funding to small businesses last year, up from eight billion dollars five years ago. "Feds crack down on lenders targeting small businesses with high-interest loans, abusive collection tactics" www.nbcnews.com (Aug. 11 2020).