Factoring Associations Attack Merchant Cash Advance Industry

As reported in the International Factoring Association’s (IFA) Commercial Factor publication, the merchant cash advance industry is being put on notice. Commercial Factor’s Terri Baker wrote in the July/August issue,

After meeting with board members from both associations [The IFA and AFA], the decision was made to deny membership to merchant cash advance businesses. This decision was based on numerous complaints and increased scrutiny that could negatively impact the factoring industry. By distancing ourselves from the merchant cash advance industry, we hope to diminish the chance of potential legislation.

We asked several merchant cash advance companies that are members of the IFA for their reaction but most seemed to be unaware of any such decisions regarding a ban. One company in particular said they had reached out to the IFA and was told there was no such ban, but that there was concern over certain practices taking place in the merchant cash advance industry.

That response contradicts statements also published in Commercial Factor’s May/June 2014 issue that leaves no room for misinterpretation. As quoted:

Due to the number of complaints that have been received, both the IFA and the AFA have voted to bar Merchant Cash Advance companies from membership in each organization. The boards of both associations felt that the model for this type of financing has changed and that there are a number of MCA companies that are not operating in an upfront manner. Given that the goal of both organizations is to assist the factoring community, we found it best to dissociate ourselves from this type of financing.

Ironically that same publication includes an advertisement that promotes merchant cash advance as a core product offering through Gibraltar Business Capital.

So what’s with the attacks? Well known factoring attorney Steven N. Kurtz delivers a blistering assessment of merchant cash advance companies in a piece titled, The Merchant Cash Advance Industry, Is it a Threat to the Factoring Industry?

Kurtz makes several arguments:

1. Reverse UCC searchers are poaching factoring clients.
2. MCA transactions often lead to breach of factoring agreements, “because the factor client granted junior liens against the factor’s collateral or took on additional debt without the factor’s consent and knowledge.”
3. MCA companies exercise control over the factor’s collateral through automatic payment collection.
4. The merchant cash advance industry is under regulatory attacks from the CFPB, FTC, and state regulators.
5. “There are a high number of new and aggressive players who have engaged in questionable activities.”
6. The North American Merchant Advance association is not able to dictate industry standards.

On his second argument, he is describing the textbook tortious interference claim already being used to go after stackers. This illustrates the expanding scope of potential dangers that merchant cash advance stackers face since it is not only other merchant cash advance companies that are being caught in the crossfire.

For his fourth argument, there are no such “regulatory attacks” from the CFPB and we are left to guess the FTC reference is related to Operation Choke Point, a campaign led by the Department of Justice in which the merchant cash advance industry is not a direct target.

On point six, he questions NAMAA by writing, “it is comprised of 16 members and does not seem to be as concerned with self-regulating and industry reputation.”

In the soon to be published September/October issue of DailyFunder’s magazine, we address many of these concerns in a lengthy feature story, called Better Practices. In it we interviewed many NAMAA members such as Scott Griest of American Finance Solutions, Andy Reiser of Strategic Funding Source, Heather Francis of Merchant Cash Group, and David Goldin of AmeriMerchant. We’ve also got commentary from Parris Sanz, the chief compliance officer of CAN Capital.

And wouldn’t you know it, we’ve also got a sidebar story focused purely on what NAMAA is doing today.

While Kurtz may be on to something when he wrote, there are a “high number of new and aggressive players”, the negative backlash against merchant cash advance companies comes at a time when the industry is enjoying its finest hour. Just recently,

• OnDeck Capital revealed they were preparing for an IPO
• Square inked a deal to expand their merchant cash advance program with the help of Victory Park Capital
• Flexpoint Ford invested in RetailCapital
• Merchants Capital Access may have potentially been acquired by the hedge fund Angelo, Gordon & Co. as published on Businessweek. We cannot confirm.
• Paypal is expanding their merchant cash advance program from the U.S. to countries overseas
• CNN Money recommend merchant cash advance companies and alternative business lenders as reputable options