Can defaulting on a merchant cash advance be a crime, or only fraud?

In a cash advance trade like MCA, funders learn to expect business owners to lie. Fake statements, loan paperwork showing someone who has left the company still owning the business… it happens every month. And these people have no hesitation about walking away with every intention to never pay the funder back. The mortgage business had its “strategic defaults” - deliberate, calculated bad faith. The MCA world has no tolerance for bad faith.

MCA Is a Factoring Instrument

Not repaying a loan is not a crime by itself. If you can’t make your payment you renegotiate with the lender for a modified payment plan, and if you can’t renegotiate you surrender your collateral. A merchant cash advance isn’t a loan, but the principal part of the transaction is the outright purchase of future credit and debit card receivables. MCA is a factoring instrument; repayment is based on a sale of your credit card receivables, and when the future receivables belong to the funders, it’s a different set of circumstances.

Hard times tempt honest owners to do bad things. The most common is to shift to a card processor the funder doesn’t know about. There is no discretion to pay or not pay. The funder is the owner of the credit card receipts as of date of sale, and you are acting improperly. Divert them and you put yourself into a position that is likely to be a crime. Do not be tempted to play hide and seek with your card receipts.

Look at the factoring fraud case of Rosalie Anjoorian and Peter Zimmerman. Factoring, buying future receivables like invoices or credit card sales, can be a legitimate business, but Anjoorian and Zimmerman misused it. Part of the crime: Anjoorian collected invoice payments and kept the money instead of passing it along to the purchasers of the invoices. The same kind of fraud is committed when MCA clients divert card transactions to a new card processor.

Easier to Lie with a Smile over the Phone

Is fraud more common in MCA transactions than with bank loans? There’s no statistical research on it. But when you sit across from your bank vice president and mortgage loan officer and hand over fake records, your courage to chance bad faith is a lot weaker. In an MCA transaction people tend to be remote from the funder, maybe out of state, and communication is often by phone, email and fax instead of in person. Signing a phone and fax agreement to sell your future card receipts may not create the same feelings. Culturally people think of bank loans as serious business and cash advance purchases as something you can try with little risk.

As convenient as it is to send faxes and attach electronic signatures, it’s not different from a wet ink signature in person. The same legal consequences come from an intentionally deceptive story. There are sections of the federal code that could be applied to a merchant cash advance fraud case.

Legitimate Default

A legitimate default (as opposed to a calculated or “strategic” default) is a monetary loss to the funder, but it’s not a crime. If you need more time or less payment and are willing to show full responsibility, call your funder, explain your situation. Both you and your funder want the business to succeed. But if business is unsustainable and closure is the only way, receivables stop when your business closes. The only recourse your funder has is the agreement he can get in the contract you signed. It’s all in the contract, but you may be happier than you think.

An MCA is a business-friendly funding instrument. But when one business owner lies on an MCA application, his fraud makes it costlier for the honest borrowers who use MCA. Funders will look carefully at your application. Before you sneak a mistake into the paperwork and close an MCA contract as if nothing is amiss, think about the consequences.