Kennedy: Use of cash advances snares some small businesses

Down to Business

A local contractor was on the hook for $530 a day — a day!

He had negotiated a so-called merchant cash advance that gave quick access to money, but with a steep daily repayment schedule. He also was subject to fast recovery of the cash advance if he missed a payment because he had signed a “confession of judgment.”

You may have heard of this obscure legal document from the series of stories Bloomberg Businessweek did late last year under the heading “Sign Here to Lose Everything.”

The stories detailed small businesses being frozen out of their bank accounts after their confessions of judgment were filed in court, sometimes going belly-up as a result.

New York has seen a rash of such filings from around the country of late. According to the stories, cash-advance companies have secured 25,000 judgments in New York since 2012, most in the past two years.

The contractor’s confession of judgment was among a dozen I counted in one state Supreme Court in just the first seven days of January. Some of the businesses hailed from New York; others were in Texas, California and Iowa.

The cash-advance agreements make clear the businesses aren’t getting loans, which would bring added oversight. Rather, they are “selling a portion of a future revenue stream” to get the cash advance.

As part of the transaction, the business owner signs an “affidavit of confession of judgment” that reads as if a default already has occurred. That document is quickly docketed in court if a payment is missed, and the cash-advance firm gets to recover what is owed almost immediately. The business owner gets no day in court because he already has waived the right to trial.

Daniel Kane, an attorney at Tully Rinckey in Colonie, says businesses should be wary of cash advances, despite the lure of quick capital.

“While an entrepreneur may have a low credit score or no collateral to put forth, he or she should still consider traditional bank loans,” including those guaranteed by federal small- business programs, he says.

If a cash advance is the only option, business owners should make sure they understand their obligations, adds Kane, who serves as director of TR Business Navigator, a service of Tully Rinckey geared to start-ups and small businesses.

Writing to Navigator clients at the start of the New Year, Kane noted that legislation on the federal level would extend the ban on confessions of judgment in consumer lending to small business, to curb asset seizures without notice.

New York also may do the same, if Gov. Andrew Cuomo follows through on a 2019 State of the State proposal to ban their use in small-business lending under $250,000.

His proposal also would stop cash-advance companies from making New York courts a go-to in collecting on defaults unless they can show “a nexus to business activity” in the state.

Marlene Kennedy is a freelance columnist. Opinions expressed in her column are her own and not necessarily the newspaper’s. Reach her at marlenejkennedy

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