Finding available cash for expansion or current operating expenses is a constant challenge for many businesses, especially smaller start-up companies. Some small enterprises have rejected common financing schemes, such as secured loans, in favor of cash advance lending. For some businesses, cash advance lending seemed to be a good fit, for others, not so much. The plight of a small start-up firm in Manhattan demonstrates the risks of cash advance lending.
The firm Fruit Street Health planned to market a diabetes prevention software that used video to link potential victims of Type II diabetes with dieticians who could examine photos of the patient’s food and track the patient’s weight-loss progress with wireless scales and wearable digital devices.
The company seemed off to a good start, but then the global health crisis struck. Fruit Street Health saw its cash reserves rapidly evaporate. The owner of the business began to search for sources of capital other than traditional loans or selling more shares of stock. The owner decided to take advantage of a financing option known as “merchant cash advance.”
What “merchant cash advance” really means
The basic business relationship of merchant cash advance financing seemed straightforward. The lender would advance cash, in return for which the borrower would repay the principal amount plus a cut of future revenue as it came in. Fruit Street Health also agreed to allow the lender access to its bank accounts so that the lender could withdraw daily sums. The contract provided that if these withdrawals exceeded the company’s ability to repay them, the lender would recalibrate the withdrawals – a process called a “reconciliation” – and reduce the strain on the company’s cash flow.
One of the cash advance lending firms from which Fruit Street Health borrowed money was BMF Advance, LLC, headquartered in Brooklyn. Unfortunately for Fruit Street, BMF Advance did not limit its withdrawals to enough cash to repay the loan. Fruit Street Health now alleges in a lawsuit recently filed in Brooklyn that BMF withdrew thousands of dollars every day from Fruit Street’s bank accounts without making any assessment of the ebbs and flows of Fruit Street’s business. The dispute soon deteriorated into a vicious war of words.
The ultimate weapon
In December, BMF filed a confession of judgment in New York State Court in Manhattan that the president of Fruit Street had signed a few weeks before. On January 5, the clerk of court in Manhattan certified the judgment that stated that Fruit Street owed BMF $800.000. By signing the agreement, Fruit Street allegedly waived all defenses to BMF’s claims for repayment. Complaints about the collection tactics of cash advance lenders are beginning to flood the New York courts, and the Assembly is examining the practices of these companies.
Anyone who has done business with a cash advance lender may experience similar collection tactics. A conference with an experienced business litigator may be an effective method of defeating the collection claims.