Legal ‘loan sharks’ could exploit coronavirus to squeeze small businesses
If merchants fall behind on their payments, some lenders send threatening emails and texts and even visit borrowers’ homes to try to collect, say lawyers and small business owners.
NBC News reviewed some of the communications, including videos of a visit by a debt collector to a borrower’s home and another visit to a borrower’s office by a swearing man trying to collect a loan . “You’ll end up getting hurt. Badly hurt,” a text message said.
The most common agreements between these companies and small business borrowers are not technically loans, and therefore their terms and the companies offering them are unregulated.
That needs to change, Chopra said. “The FTC needs to seriously consider the rules that ban some of the more extortionate clauses in these loan contracts,” he said, adding that the FTC is ready to “take on some of the loan sharks and their lawyers who run trial factories which are repository for some of these dummy collection actions. “
How it works
Merchant cash advance companies like PowerUp make cold calls, emails and texts to small business owners offering quick and easy financing, the merchants told NBC News. The offers are appealing to homeowners who often operate at the limit and are strapped for cash.
Corporations typically provide a predetermined amount of money to a business in return for future revenue. As in any industry, some business practices are more problematic than others.
The agreements are binding contracts that borrowers have agreed to, lawyers say, but some of the aggressive collection practices, such as visiting borrowers’ homes, are not legal, they say.
Under a typical deal, a business may receive $ 40,000 in exchange for agreeing to hand over $ 50,000 in future income over a few months. Merchants are generally required to repay advances via automatic withdrawals from their bank accounts every day or week.
To secure financing, business owners must provide documents detailing their recent sales and identifying their business partners, including customers, and the amounts they owe, called accounts receivable.
Homeowners must also give lenders unlimited access to their bank accounts for automatic withdrawals. If income dries up and money stops flowing, cash advance companies can freeze the accounts of business owners by filing so-called admissions of judgment.
Companies often choose to make the deposits in New York State because its status is powerful and easy to use. For example, filings can be entered without a hearing or review by a judge.
Deposits are often amounts that are twice as much as the money owed, say lawyers who work in the arena. They are deposited without the knowledge of a company; traders often learn about them when they try to pay their employees and find their accounts blocked, lawyers say.
Merchant cash advance companies often require borrowers to also pay attorney fees, which can be anywhere from 25 to 33 percent of the balance owed under a borrower agreement, according to the documents.
Legal filings from cash advance companies, including admissions of judgment filed against small businesses, have exploded amid the coronavirus crisis. New York State court records show at least 313 lawsuits filed by 98 companies from March 9 to 20.
The flood receded when courts in New York City stopped accepting electronic filings in non-essential cases on March 23.
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Itria Ventures of New York, a subsidiary of Biz2Credit, is among the merchant cash advance companies that filed numerous lawsuits in March. During the three-week period, Itria sued 20 small businesses for non-payment, according to court records, most of them out of state. In all cases, companies had stopped paying by March, although Itria Ventures said some of the flaws dated back to months before the coronavirus blocked operations and governments demanded the shutdown of many non-essential businesses. .
Small businesses that Itria sued included a construction company in Minnesota, a grocery store in South Carolina, a Holiday Inn Express in Wyoming and a barbecue in Alabama, according to court documents.
Lone Spur Café, a six-restaurant chain in Arizona and Colorado, was also sued by Itria on March 19, with a claim for $ 282,000.
On March 23, Kayla Kight, a server at a Lone Spur in Prescott, Ariz., Told NBC News that hers was the only restaurant in the group open for business and that it only offered take-out.
Business hurts, Kight said over the phone. “It’s gone down a lot, over 50 percent,” she said. “Usually, we are usually very busy. But there is no one outside.”
NBC News asked Itria and Biz2Credit why they are adopting such an aggressive strategy against small businesses during a national disaster.
Rohit Arora, co-founder and managing director of Biz2Credit, said in a telephone interview: “In some cases we have to file these cases, but we are also trying to work with our clients. A lot of these companies had problems before the coronavirus. ; they were on a payment plan and they defaulted. “
Shortly after NBC News spoke to Arora, Itria withdrew her lawsuits against Lone Spur and other small businesses, court records show. He said the shares were dropped because they made payment plans.
‘A cycle of death’
“Today more than ever, small businesses will need alternative loans,” said Shane Heskin, attorney at White and Williams, who represents Indelicato of North River Outfitter and other traders against direct lenders. “You can’t let people freeze their assets and demand payments at a time like this.”
When merchants fall behind on their payments, some direct lenders send threatening emails and texts, say the owners and their lawyers. (NBC News received no evidence that PowerUp, Itria, or Biz2Credit sent threatening messages to borrowers or sent debt collectors to their homes, or engaged in any other improper collection practice.)
“If you don’t send me money today, you’re done,” said a recent text shared by a business owner. “I’ll put you and your family in the hospital, call the police, I don’t care, you and your family will pay.” Other text to the landlord included a Google map showing a driving route the debt collector was taking to get to the borrower’s home. “Currently on the way for you right now,” the text reads. “I’ll show you what type of loser you are, you are a man’s clown.”
Heskin, who testified to Congress last year about lender tactics, said one of his legal partners found a rat gutted on top of his mailbox outside his home. He provided a photo to NBC News.
Indelicato said he started dealing with merchant cash advance companies around 2016, when he wanted to grow his business and needed more money than his conventional bank loan could provide. He said the companies almost killed his business.
“We’ve gone from good credit and eight or nine stores to bad credit and three stores,” Indelicato said in an interview. “On some of our loans, we were paying over 200 percent. It has become a cycle of death. They have access to your bank accounts – they can wipe an account overnight.”
On March 27, NBC News contacted Bernard Feldman, a lawyer for PowerUp Lending, about the Indelicato case. In a return email, he said the company has decided to step down for now. “We have no intention of pursuing this matter at this time,” Feldman wrote.
An email to PowerUp requesting comment did not receive a response.
Jon Runion, of the Runion Dental Group, in Columbus, Ohio, is another small business borrower who has gotten through a mess with merchant cash advance companies.
By mid-2018, Runion, an oral surgeon, wanted to add a second location to his practice and had obtained initial approval from a bank for funding. But the bank backed down after signing a new lease and starting construction on the second office, and in the spring of last year, Runion said, it was in desperate need of financing. The only source of capital he could find was from the merchant cash advance companies.
“Working with a broker, I thought he was going to get me a traditional loan – that’s how the conversation started,” Runion said. “He more or less introduced me to the net money I would receive and the payments. He didn’t talk too much about how secure it was or how it worked.”
Shortly after receiving the money, the amount of refunds started to skyrocket, Runion said. When they hit $ 70,000 a month, he struggled to pay his salespeople.
Runion said he told the cash advance companies he couldn’t afford to pay them. “Their strategy was always to get more,” he said.
He stopped paying Thanksgiving and hired a restructuring company, Second Wind Consultants, to help pay off the loans.
On March 15, the governor of Ohio ordered the end of all oral surgery procedures; The office in Runion is now open six to eight hours a week.
Runion said the companies that advanced cash to him persuaded an insurer holding $ 40,000 in refunds for procedures he had already performed to send the money to the company upfront, not Runion. Other insurers stopped reimbursing Runion after the Advance company notified them that it sued him. Merchant cash advance agreements generally allow these remedies.
Runion admits he signed the documents that created the problems. “I tried to get it to work,” he said, “but I really couldn’t do it.”
Meanwhile, as the crisis spreads, cash advance companies are looking for new customers. Some business owners have said they are inundated with new text messages and emails offering funds.
“They’re all capitalizing on the virus right now,” said one embattled borrower, “and they’re here to help.”