“Why are you screwing us over?” the phone call begins. “We’re coming after you … you stole from the wrong company, my friend.”
“How did I steal from you?” the recipient of the call asks.
“You stole from us. You blocked my payment.”
“I blocked your payment because I don’t have sufficient money.”
“Well, that’s not my problem … next week you’re going to be crying, tears running down your face, you’re not even going to be able to get a hotdog, nothing … you think you’re going to fight us? Are you crazy? You’re crazy … do you know how much money we have? We have millions. We will never ever lose a battle.”
“Listen, if I have some money, I will pay you guys. I just needed a break. All I needed was just one month of break, just one month of break…”
“I don’t f—ing care. You better get your sh– together. We are coming after you.”
That phone call hearkens back to a different age in America, one in which unregulated loans sharks preyed upon desperate borrowers, and the system provided no refuge or assistance. But that phone call wasn’t recorded 100 years ago. It was recorded in December 2017 by a small business owner in Mississippi, who took out something called a merchant cash advance.
In the past decade since the financial crisis, the merchant cash advance business exploded. The widespread theory is that bank lending to small businesses dried up, thereby providing an opening and a need. According to an industry specialist named Bryant Park Capital, the MCA business hit $10 billion in 2015. A recent press releasecelebrating an industry merger said that today, “fintech” lenders accounted for 25% of U.S. small business loans, or $31 billion.
But as lawsuits and defaults pile up — and a search of court dockets reveals thousands of each — there are growing questions about what this industry actually is. Is it, as proponents say, a new and important way for strapped small businesses to access much-needed credit? Or is it just the latest and greatest way for unprincipled lenders to prey on desperate people, as they’ve done since time immemorial? “This entire ecosystem is on a treadmill for loan growth,” says one skeptic, who has spent years investigating the industry. “It ultimately will fail, taking with it a lot of good businesses and business owners.”
Ostensibly, merchant cash advances are part of the new and shiny world of fintech, where funders outside the banking industry promise technology that can allow them to provide capital more efficiently and effectively. Venture capitalists and regulated banks have poured money into companies such as OnDeck Capital (ONDK) which went public in late 2014, and which offers small business loans, and CAN Capital, a merchant cash advance company, which in April 2015 raised $650 million from Morgan Stanley, JPMorgan Chase, and other banks.
Merchant cash advances technically are not loans (although often even industry participants will use the lingo of “borrowers” and “lenders.”) Rather, they are akin to something called factoring, which is when a funder advances cash against an invoice, generally at a discount to the face account and is paid when the invoice is paid. In an MCA, a funder buys a specified percentage of a company’s future receivables. It’s riskier for the funder than factoring is because the receivables, unlike an invoice, don’t yet exist. The risk to the merchant is supposed to be less than that of a loan, because the payment is not supposed to be fixed, but rather is supposed to be tied to the actual business they do. Although MCAs at their best carry enormously high annualized interest rates, advocates argue they can be useful in certain circumstances — say, a seasonal retailer needs to stock their store with merchandise before the holidays or a business needs to purchase a piece of equipment to win a contract.
Some industry participants say the industry often functions in an above-board way that is beneficial to merchants. Of course, happy merchants aren’t as public, and it’s impossible to know how the business breaks down. Because MCAs are not supposed to be loans, they are almost entirely unregulated. They aren’t subject to usury laws or banking laws like the Truth in Lending Act.
And as that threatening phone call shows, there is also a dark underbelly to the business. There are people in the MCA business with criminal records, or who have settled civil charges, and collection tactics can seem aggressive, to say the least. Often, deals are brought to funders by brokers who are part of so-called ISOs — independent sales organizations. There are no requirements for being a broker. Some will lure clients in with promises that their deal will convert to a long-term, low interest fix rate loan — and then, after collecting their fee, they disappear.
A quick and very incomplete list of industry participants:
Yellowstone Capital was co-founded by David Glass, who was still on probation for insider trading when he founded Yellowstone. He has said that he learned his sales techniques working at Sterling Foster, the defunct Long Island brokerage whose employees faced multiple charges of stock manipulation and which became the basis for 2000 film “Boiler Room.”
John Braun, who often is affiliated with an MCA company called Richmond Capital, was arrested in 2010 and charged by federal prosecutors with being the head of a billion dollar-plus international drug ring that smuggled pot into the U.S. from Canada, and at its peak made more than $6 million a week. According to the indictment, he sent a text to an associate who had threatened to go to the police: “if you interfere with my life and make me uncomfortable, you will leave me no choice but to do the same back to you in a much worse way.” He pleaded guilty in 2011 and eventually was released to home confinement. This June, his lawyer submitted a memorandum asking for the mandatory minimum 10-year prison sentence, which is well below guidelines, citing, as evidence of good behavior, Braun’s work for Richmond Capital, along with testimony from family and friends as to his character. (Braun says, “I screwed up when I was a kid,” points out that marijuana is legal in many states today, and says that all he wants to do is run his business.)
Par Funding, which is also known as Complete Business Solutions Group, or CBSG, is run by Lisa McElhone. Her husband, who also works in the business, is Joseph LaForte. In 2009, LaForte, who already was serving time on unrelated charges, pleaded guilty for his role in an illegal gambling ring. (A person familiar with the family points out that the criminal conviction has no connection to the current business, and notes that people with criminal records are sometimes more careful in the future to stay on the right side of the line.)
And so on.
Some MCA agreements look like payday lending — except arguably worse. Just as in payday loans, merchants are required to give the funder access to their bank accounts, from which daily or weekly payments are withdrawn. The implied interest rates and fees are exorbitant. Consider a California-based not for profit called Antelope Valley Community Clinic, which provides healthcare services to underserved populations. Antelope Valley, according to a lawsuit, took a $250,000 loan from Yellowstone. As additional consideration for making the loan, Yellowstone also charged Antelope $25,000 for a “professional service” fee. A broker also charged a $7,500 fee. Thus, Antelope Valley netted only $217,500. The total amount Antelope Valley was required to repay in principal and interest: $374,750. Less than a month later, Antelope Valley repaid the first loan by taking out a bigger one from Yellowstone. In this case, there was a $45,000 professional service fee, and a $22,500 broker fee. Antelope Valley netted $382,500 and had to pay back $674,550. (In filings, the MCA companies denied any allegations of wrongdoing; the case was settled on confidential terms.)
Merchants are often naive. “What I learned is that the majority of borrowers know their industry, but they don’t understand the financial aspect,” a former industry participant says. “You can get cash in 24 to 48 hours and it seems so easy. Then it spirals. You pay back what you got but you still owe another 50%, so you take another loan to help you pay the first one back.”
“It is insanity,” says Shane Heskin, a lawyer at Philadelphia’s White and Williams, who has become something of a crusader against the industry’s worst practices. Heskin is a specialist in complex insurance disputes — but a desperate late-night phone call from his father-in-law, who had taken out MCAs when his 100-year-old, third-generation owned family business, Liner Tire, hit a cash flow shortage, added a whole new line of work. Heskin was shocked not just by the rates, but by what he regards as some of the blatant misrepresentation, and the incredibly aggressive collection tactics. Heskin ended up filing a lawsuit, and since then, he says, he’s been flooded with phone calls from desperate small business owners around the country. “This is a national epidemic,” he says.
Heskin saw first-hand with his father-in-law how the first unaffordable advance often turns into many more. As a lawsuit filed by Yellowstone against a slew of debt reduction companies — some of which are helpful to merchants, but some of which are equally predatory — said, “These renewals of Merchant Cash Advance Agreements, and making of new agreements with existing merchant customers, are an important source of revenue for Plaintiffs.” “It’s like crack,” says one merchant. Often, the new money simply refinances the existing debt, and the required repayment snowballs. Look again at Antelope Valley, which eventually was supposed to pay back $4.3 million in cumulative MCA debt — although the business had gotten less than $1 million in actual proceeds, according to legal filings. Over $500,000 was charged in fees.
Another of Heskin’s cases involves North River Outfitters, a clothing retailer with locations in Beacon Hill, Martha’s Vineyard, Nantucket and Wellesley. Jason Indelicato, who along with his wife Alice owns NRO, took out MCAs to bridge a short-term cash gap while they were looking for an equity partner. They too soon found themselves taking out new advances in order to pay off existing debt. “You get in and you think you’ll be able to get out but you cannot,” says Jason Indelicato. “The reason usury laws exist is that people don’t know what it feels like to be under enormous financial pressure,” he adds. “We’ve got 50 employees who need paychecks, so you make bad decisions. You feel embarrassed and ashamed, like it’s your fault.” According to a lawsuit NRO filed against various MCA companies, including Yellowstone, in July 2016, MCA companies including Yellowstone contracted to take nearly 150% of NRO’s receivables. (The case is still in the pleading stage; Yellowstone has argued it should be dismissed.)
Unlike payday loans, which can be subject to state usury laws, MCAs are able to avoid interest rate caps because they are not supposed to be loans. “Our repayment figures aren’t rigid, and they don’t remain the same every month,” reads one set of Yellowstone’s marketing materials. “Instead, you’ll only pay what your business can afford.”
Nonetheless, some MCA deals look and act just like loans. Repayments are structured as a specific dollar amount, which is due daily or weekly. The fine print of the contract might contain a “reconciliation provision,” in which the merchant is supposed to be able to ask to have the cash payment “reconciled” to the actual amount of money coming in the door.
But the reconciliation provision may come with caveats. “To effectuate this reconciliation…the Merchant must produce any and all evidence and documentation requested by Yellowstone in its sole and absolute discretion,” reads the fine print of a contract between Yellowstone and a borrower called DET Medical, according to court documents filed when DET didn’t pay. “Merchant specifically acknowledges that the daily payment and the potential reconciliation discussed above are being provided to Merchant as a courtesy, and that Yellowstone is under no obligation to provide same,” it continues.
A “phantom reconciliation” is what another borrower, Carspot.com, calls it in a lawsuit filed against Yellowstone and others. (The case was dismissed, in essence because the language of the contract does provide for reconciliation. Regardless of whether the provision is in practice meaningless, New York courts generally have sided with the MCA companies.) In the lawsuit Heskin filed on behalf of Liner Tire against defendants including Yellowstone, Richmond Capital Group, and others, he notes, “In more than two-and-a-half years, not a single Defendant has ever reconciled its daily specified payments or refunded a repayment based on this purported reconciliation provision.” (The case was settled. Power Up’s portion was settled on confidential terms. Yellowstone forgave the alleged balance of $83,982. Liner Tire paid Richmond and affiliated entities $20,000. Yellowstone says that the only common thread in these cases is “each business’s failure or unwillingness to avail themselves of contractual provisions that are solely for their benefit, and notes that it now offers merchants both a retroactive and a prospective adjustment of the payments.)
Yet another borrower, Dominique Maciejka, who runs a business called Forget Me Not Fashions, took out an MCA from a company called Quicksilver Capital in 2018 in order to finance the merchandise for a new store. She thought the specified daily payment of $304 sounded high, but she says her broker reassured her that after a month, the payment would be adjusted to suit her actual sales volume.
So, she began to call Quicksilver, requesting the reconciliation, only to get the run-around. Eventually, she began to record the calls. One tells her she must have an “old version” of the contract, according to her lawsuit. Another tells her over and over again that she “does not qualify,” and then hangs up on her. Yet another tells her that she needs to get back in touch with the broker who steered her to Quicksilver so the broker can explain the “contract breakdown.” When she persists, saying that she understands the letter of the contract just fine, and wants the reconciliation, the rep finally says, “With us, with Quicksilver again, if we give you a contract for $10,000 where the daily payment is $200 and it’s for a six-month term, then basically you have to pay $200 for six months until the advance is paid in full.” (Quicksilver’s CEO, Michael Puderbeutel, did not return a direct email asking for comment.)
Norman Valz, who until recently was a lawyer for CBSG/Par Funding, says he doesn’t want to denigrate any particular borrower by commenting on a specific case. But generally, he says that many MCA customers are quite sophisticated and are well aware of what they are signing. For all the cases of alleged bad behavior by MCA companies, there are also some where MCA customers are clearly trying to scam the MCA providers. Industry participants say borrowers open new bank accounts in an effort to hide revenues, or sign up for multiple MCAs — a practice called “stacking” — before funders can find out. Just as in subprime lending, borrower fraud appears to be rampant too.
“It’s very seldom that borrowers are told no [when they ask for a reconciliation],” says Valz.
In response to borrower fraud, a longtime industry lawyer says that MCA companies have become more aggressive about the use of another weapon in their arsenal. Although Yellowstone, for instance, says in marketing materials that its MCAs are “unsecured,” merchants are required to sign something called a “confession of judgment,” or COJ. These are often filed in New York, sometimes in what Valz calls a “secret court” in Kings County, where they are not available online and merchants and their lawyers cannot find them. But once the judgment is filed — and the agreement often stipulates that the MCA provider can tack on an additional 25% of the amount owed as “fees”— within a very short time, the MCA provider can freeze all of merchant’s bank accounts and put liens on their personal assets, sometimes before the merchant even knows the COJ has been filed. In one case, an MCA company put a lien on a merchant’s elderly mother’s home, because the merchant was a co-signor on the mortgage. In another, a merchant’s disabled mother listed her son on her savings account in case something happened to her — and the MCA company froze that account. “They tell you it’s unsecured and then they come after you,” says yet another small business owner.
Even Valz thinks some aspects of the COJ, including the use of the “secret court,” have gone too far. Because merchants may have multiple MCAs, and the first MCA company to file the COJ gets the money, there is a race to be first to file — which increasingly means MCA customers get no breaks.
“They took every penny I had in one night,” says Chad Day, who runs a landscaping business in Georgia, and who found himself with MCAs, he says, after his former partner and bookkeeper conspired to take out an MCA, put his name down as a guarantor, put the proceeds in a bank account that he didn’t know about, and then disappeared. (Day has sued. One court dismissed his case, arguing that he did not bring suit quickly enough. He has filed an appeal.) He alleges that Yellowstone funded the MCA without asking for an ID of any kind; Day’s supposed signature was printed in block letters. He did sign the confession of judgment, though — with a slew of other papers his bookkeeper asked him to sign — but even the address on it lists the wrong county. Day says he made a “stupid’ mistake: When he found out about the bank account, which had only around $300 left in it, he moved the money to a new account. Since then, he’s been fighting to save his business, which is difficult because he has no access to funds. “I went to bed thinking I had 19K in my account. I woke up, and my accounts were frozen,” he says. “I had no options.” (Yellowstone says Day only alleged fraud after the two parties had agreed to settle, and he again defaulted. But Day has emails he sent to a Yellowstone representative alleging fraud immediately.)
In some cases, according to lawsuits and interviews, when merchants can’t pay, the industry seems to take on aspects of an era that is supposed to be long past. “I’ve worked in the motorcycle business for 35 years and I don’t scare so easy,” one borrower says. But he says his MCA providers frighten him. “At one point, they said to me, ‘You need to stop talking because I’m going to take everything you own and you’re going to commit suicide,” he says. “It’s, ‘Oh buddy, we’re going to help you, we’ve got your back,’” says Indelicato, the NRO owner who is involved in a lawsuit with several MCA companies. “The minute you can’t pay they attach a lien to your house and freeze your bank accounts. Or they’ll text you nice things, like ‘Don’t worry pal, we’re buddies,’ to get you to call them. And then they scream at you: “You know how f—-d you are, we’re going to take your house, you’re going to jail.”
When Liner Tire was unable to pay, Barry Liner’s contact at Yellowstone texted him, according to his lawsuit: “You’ve really f—-d me over and put me in a terrible situation and I hope you have the human decency to make this right. Otherwise, we put out $500M per month, do you think you have the war chest to keep up with us in court? Come on man.”
It got worse. “In December 2016 two representatives from one of Liner Tire’s lenders made an unannounced visit to Liner Tire during normal business operations demanding immediate payment,” Barry Liner writes in an affidavit. “I felt personally threatened and believed that physical harm would come to me and my family if I did not meet their demands. I was left with the distinct impression that these two ‘associates’ were tied to the mafia, and I have since been in constant fear of my physical safety.”
“People think it is impossible that something like this is happening,” says the Mississippi merchant who recorded the phone call, about his situation and the threatening phone call he received. “No one would believe you.”
Yellowstone is one name that crops up over and over again. Heskin, who has tallied up the numbers, says that in the last three years alone, Yellowstone and its related companies have filed public COJs against 5,000 merchants.
Glass, who according to a company press release exited management in 2013 and sold his stake in 2015, founded the company with his brother-in-law, Isaac Stern, who now serves as CEO. They made plenty of money. “In the few years of Yellowstone’s existence [the two] have personally taken more than $60 million between the two of them in compensation, distribution or other payments from Yellowstone,” says another lawsuit, filed in 2014, between Yellowstone and a company called Second Source Funding, which argued that Yellowstone stole its business model. (Yellowstone won that case; the company adds that Second Source “had an incentive to provide vastly inflated and wholly unsupported figures.”)
Yellowstone’s online ads have featured characters like one Dr. Dershowitz, who tells other would-be customers, “When the funds got low, I was in over my head… So I went to the bank and when they ran my credit, the lady laughed at me. So I went online and found Yellowstone Capital. I applied for a loan on Monday based on my monthly sales and on Wednesday they gave me my money. It’s crazy because my heart rate is higher than my credit score. So if you need money you need to apply right now while their computers are still giving out money to basically any business owner with a pulse.”
“At what point do we stop helping small business?” Stern said to deBanked, in response to a question as to whether or not some businesses simply should not qualify for funding.
Some merchants would not agree that Yellowstone “helps” small businesses. According to a lawsuit filed in April 2018, a Virginia-based healthcare service provider called Y-CAPP, run by Jonathan Coleman and Donna Pierce Baylor, entered into its first MCA with Yellowstone in June 2012. By September 2017, Y-CAPP had done 17 MCAs, most of which were used to pay off previous balances. Thus, a $50,000 initial deal mushroomed into a $559,600 debt that Y-CAPP had no hope of paying, and indeed, they began to miss payments.
Yellowstone agreed to temporarily reduce the payments — with the condition that they increase again, and that Y-CAPP would have to make up the difference. After a billing delay caused Y-CAPP more problems, the Yellowstone representative, whose name is Steve Davis, responded, “That’s not going to work.” And then, Yellowstone filed the confession of judgment for $613,746.13 — there was an extra $122,403.75 tacked on. “They demand the money no matter what you have coming in,” says Coleman. “Any business is going to have ups and downs, but they are not concerned about the downs. They will take whatever they can and leave you holding the bag.”
Among the accounts they froze was one belonging to Donna Pierce Baylor’s father, which is where his Social Security payments were sent — because she was a signatory on the account. When Y-CAPP hired Heskin to help, Coleman got a text from Davis: “Really ?????? Thanks for hiring a lawyer to sue me after all i did for you…This is on buddy….so good luck. This will be a legal war and I promise I will watch you crash and burn and lose everything you worked for…this is as personal as it gets for me and will make it my business like never before to come after you personally and your business that you own (for now)…” (The case is in the pleadings stage; Yellowstone argues it should be dismissed. The company adds that COJs provide a mechanism for an MCA company to recover money from a merchant who has defaulted. Davis, for his part, says that he had come to regard Coleman as a friend, and had some $400,000 of his own money in the deal. “The text I sent was nothing more than someone who feels hurt and betrayed,” he says. “Trust me, there’s a lot worse.”)
“The judgment collection devices they wield are devastating,” says Heskin. “Either you capitulate to criminally usurious terms or go out of business.”
Aggressive collection tactics don’t seem to be a one-off situation. In September 2014, a man named Tom Suess, who runs a small insurance brokerage called CR Stelling, took out an MCA from Par Funding/CBSG after he started having cash flow issues. As often happens, he ended up taking out multiple MCAs — seven in his case, most of them with CBSG, according to a lawsuit he filed. Eventually, he couldn’t pay. As soon as he missed a payment, he got an email from his representative at CBSG, saying that he had to make additional payments, or his personal properties would be taken away.
The next day, a collection agency called Rainer Lloyd, which was supposedly working on behalf of CBSG, but which Heskin cannot find in order to sue, sent Suess’s clients an email message. In bolded and starred font, it read: “We now own your insurance carrier and If you choose not to pay your account will be dropped.” Suess is a broker, not a carrier, so there was no way that clients’ accounts would be dropped — but the clients couldn’t be sure of that. (CBSG had filed the confession of judgment in Pennsylvania, and the lawsuit was dismissed by a court in that state, which does not have usury laws for business. CBSG then filed another confession of judgment in New York, attesting under penalty of perjury that no prior relief had been requested. Heskin moved for reconsideration and that motion is pending.)
“They got me in really bad shape,” says Bruce McNider, who owns a boat dealership in Alabama, and who also took out MCAs from CBSG, and ended up filing a lawsuit. After he defaulted, CBSG sent letters to his dealers, saying that any payments that were going to go to McNider were supposed to go by “court order” to them instead, and the dealers could face legal action for not complying. When CBSG’s attorney was asked to provide documentation of the court order, he acknowledged that no such order existed.
But the damage was done, and one of McNider’s major dealers cut him off. “If you can’t sell boats, you can’t pay anyone,” McNider says. His business, which was doing over $4 million in annual revenue, is now down to a fraction of that. He was out of town meeting with a bankruptcy attorney when a heavily muscled man showed up on his premises, and told his staff, “I’ve got an appointment with Bruce McNider. It doesn’t matter who I am. I need him now.”
“He let them know I owed him money and he was hunting me,” says McNider, who called his wife’s uncle, a local sheriff. By the time the sheriff arrived, the man was gone. Representatives from his MCA companies even began calling his wife, who had never signed anything, sometimes over a dozen times in a day, he says. “They call and harass her, tell her she’s liable, that they are going to garnish her wages and take everything from her,” McNider says. (Valz declined to comment on specific MCA customers. But in legal filings, CBSG argued that McNider intentionally set up new companies in an effort to avoid paying CBSG; Heskin says that’s untrue. Just before the case was supposed to go to trial, CBSG forgave what McNider owed.)
It’s not clear how much of the alleged bad behavior is sanctioned at the corporate level. A complaint filed in late September 2018 by a Delaware-based LED lighting company called Gateway alleges that Steve Davis, Jonathan Braun, and others conspired to “backdoor” merchant applications. That means a merchant would apply for money from one MCA company through a broker, and the broker, without authorization, would share the merchant’s confidential information with another MCA provider, which would then swoop in to offer a seemingly better deal.
In Gateway’s case, owner Harper Franklin Zarker alleges in his lawsuit that Steve Davis leaked his information to Braun — operating under the alias “Jack Snyder.” “Snyder” then offered Gateway multiple MCAs, and eventually offered one big MCA that could supposedly be used to pay off all of Gateway’s outstanding MCA debt. But once Zarker signed, Snyder disappeared — and didn’t pay off the creditors.
Yellowstone says that they have “unilaterally terminated” their relationship with Davis. They add he was never an employee, but rather “the owner of a third party company with whom Yellowstone contracted.” Davis for his part, says that he had helped start Yellowstone, was its “number one earner,” and that it was “time to move on.” Both Braun and Davis, who describe themselves as friends, say the complaint is fabricated. “It’s 110% inaccurate,” says Braun, who says he has never used an alias. Davis says that it was made up by “someone who has some kind of vendetta against John, me and anyone who is successful.)
Both Davis and Braun also say that their happy customers far outnumber their unhappy ones. That’s hard to know, both for the two of them and for the industry as a whole.
But the business does appear to have entered a new and frenzied phase. Multiple business owners who have defaulted on their MCAs, and even those who are embroiled in lawsuits, say their phones ring off the hook and their inboxes are flooded with offers of more money. “If you charge enough, you can make so much money on the successes that the failures don’t matter,” one industry participant says. “A firm might have a 60% human default rate and a 15% dollar default rate.”
There is some evidence that some of the ultimate financiers of this have gotten cold feet. Wells Fargo exited the business in 2016. (Wells declines to comment further.) But Bank of the Internet, which just renamed itself Axos Bank, is still financing these loans. (Axos did not return a request for comment.)
Just as with subprime lending, at a certain point there are no more borrowers, and when the growth slows, the extent of the losses because obvious. If these horror stories are at all representative of the industry, maybe we should hope that day comes sooner rather than later.
Bethany McLean is a contributing editor at Vanity Fair and bestselling author. Her latest book, “Saudi America: The Truth About Fracking and How It’s Changing the World,” came out in September 2018.