Merchant cash advance fraud

What it is

A small business gets turned down for a bank loan, or just needs cash faster than a bank can move. A broker or the lender itself offers a “merchant cash advance”, not a loan, they’ll stress, but a purchase of a fixed slice of the business’s future sales, funded in a day or two. In exchange, the business agrees to a fixed amount debited from its bank account every business day, and often signs a confession of judgment: a document giving the lender the right to go straight to court and freeze the business’s account if a payment is missed, without a hearing.

This is not a fringe corner of small-business finance. New York’s attorney general secured a $1.065 billion judgment against a single network, Yellowstone Capital and its affiliates, that canceled $534 million owed by more than 19,000 small businesses, at effective interest rates the state alleges ran as high as 820% a year.

How it actually works

1. The pitch

   A broker or lead generator cold-calls, texts or emails a business that has been turned down by a bank, offering “same-day funding”, framed from the first sentence as a sale of future sales, not a loan.

2. The paperwork

   The contract is structured as a purchase of a fixed amount of future receivables, which is exactly why it escapes state interest-rate caps and federal Truth in Lending disclosures a loan would require.

   Where it could have stopped

   A merchant cash advance is legally a purchase, not a loan, which is the entire reason it isn’t covered by usury limits or truth-in-lending rules. The FTC’s case against Richmond Capital Group / RCG Advances alleged the company advertised “no personal guaranty of collateral” while its actual contracts required one anyway, the “purchase” framing doing the same disguising work one level up.

3. The confession of judgment

   The business owner, often without an independent lawyer reviewing the contract, signs a confession of judgment, pre-authorizing any future lawsuit over the debt without a hearing.

4. The daily debit

   A fixed dollar amount is withdrawn from the business’s bank account every business day, regardless of how much, or how little, the business actually sold that day. New York’s attorney general documented one Manhattan bakery paying over $2,000 a day before it closed after nearly 30 years in business.

5. No reconciliation

   Reputable providers promise a periodic “true-up” that lowers the daily debit when sales fall. The FTC’s own staff perspective on small business financing warns that some providers simply don’t perform it, so the fixed payment continues straight through a slow month.

6. Default, and an instant judgment

   A missed payment can trigger the confession of judgment being filed, often, prosecutors allege, in a court far from where the business operates, freezing the account before the owner has a chance to contest anything.

7. A rigged appeal

   New York’s attorney general alleges one online arbitration platform was secretly built with MCA companies’ input to favor them: about 97% of roughly 3,000 arbitrations proceeded without the small business appearing, and the platform ruled for the lender almost every time.

8. Collection escalates

   The FTC’s case against Robert Giardina and RCG Advances alleged collectors threatened physical violence, including, per the complaint, a threat to “break his jaw”, and made false reports to third parties to pressure payment.

Why it works

The need is real and the timing is brutal. A business that can’t make payroll this week cannot wait six weeks for a bank’s underwriting process, an MCA can fund in a day or two, which is precisely the gap conventional lending doesn’t fill.

The “purchase, not a loan” framing is a genuine legal distinction, not just marketing. Because an MCA buys future receivables rather than lending money, it sits outside the interest-rate caps and disclosure rules that would otherwise force a lender to state the true annual cost, a structure regulators are now arguing, in specific documented cases, was used to disguise what was functionally a loan.

A factor rate reads as cheaper than it is. “1.4 times the amount advanced” sounds like a fee, not an interest rate, and providers are not required to translate it into the triple-digit APR the FTC’s own staff perspective says it can amount to.

The confession of judgment removes the business’s only leverage in a dispute. Once signed, a missed payment doesn’t lead to a negotiation; it can lead directly to a frozen account, before the business gets a chance to explain a slow month, a late-paying customer, or a billing error.

And the enforcement mechanism can be rigged at every later stage, too. Even a dispute process meant to be neutral can, prosecutors now allege in one case, be built by the industry it’s supposed to referee.

Where it comes from

Entirely domestic, running through New York’s courts more than any other single jurisdiction, because that’s where MCA contracts are drafted to send the confession of judgment.

These are US finance companies operating openly, with names and offices, not an offshore operation. Richmond Capital Group, doing business as RCG Advances, and Yellowstone Capital and its roughly two dozen subsidiaries and aliases, are the two most heavily-litigated MCA networks to date, both New York-based, both the subject of multiple separate federal and state actions.

Scale runs from a handful of brokers to a network canceling debt for tens of thousands of businesses. Yellowstone’s settlement alone covered more than 19,000 small businesses nationwide; the FTC’s case against RCG Advances and its principals produced over $2 million in initial redress before a further $20.3 million judgment against one defendant who took the case to trial.

Enforcement is entirely civil in the documented cases here, mixing federal and state authority. The FTC has pursued MCA operators under its general consumer-protection authority and the Telemarketing Sales Rule; New York’s attorney general has used the state’s own lending and consumer-fraud statutes to secure far larger judgments, including the industry’s largest to date.

And the fight has moved from the loan contract itself to how disputes over it get resolved. The most recent documented case on this page targets not a lender but an arbitration platform, evidence that even after regulators close off one enforcement mechanism, the industry’s next move is to build a new one.

Real cases

Red flags

• Any funding pitch stressing “this isn’t a loan” as its first selling point, rather than explaining what it actually is.
• A “factor rate” quoted instead of an interest rate, with no one willing to convert it to an annual percentage.
• A confession of judgment in the paperwork, a clause letting the lender obtain a court judgment against you without a hearing.
• A fixed daily or weekly debit that doesn’t adjust with your actual sales, despite being marketed as revenue-based financing.
• No promised “true-up” ever materializing during a slow month, despite it being part of the pitch.
• Pressure to sign within hours (“funded by tomorrow”) on a contract you haven’t had a lawyer review.
• Being offered a second or third advance while still repaying the first, “stacking,” which multiplies the daily debit against the same revenue.
• An arbitration clause routing disputes to a platform you’ve never heard of, rather than your local court.

If it’s happening to you

1. Do not sign a new advance to cover payments on an existing one. Stacking is how a single cash-flow problem becomes several simultaneous daily debits.
2. Get the complete contract and a plain accounting of what you’ve paid to date, including whether you signed a confession of judgment and, if so, which court it names.
3. Talk to a small-business or consumer attorney before a payment is missed, not after, many legal aid organizations and small-business legal clinics handle exactly these cases, and options narrow sharply once a confession of judgment is filed.
4. If a judgment has already been entered against you, ask a lawyer immediately whether it can be vacated, courts have set aside confessions of judgment in cases where the underlying MCA was found to be a disguised loan.
5. Report it to the FTC at ReportFraud.ftc.gov and, if you’re in New York, to the Attorney General’s office, which has brought the largest actions in this area to date. See where to report for other jurisdictions.
6. Read any arbitration clause closely before a dispute arises, and ask who selects the arbitrator and under what rules, a genuinely neutral process should be able to answer both questions plainly.

Where the money goes

Real money changes hands up front, the business does receive the advance, which is part of why this scheme is harder to spot than one built purely on a stolen payment. The harm is in what comes back out, and how it’s enforced.

The lender funds the advance directly to the business’s bank account, typically within one to two business days. Repayment then flows the other way, in fixed daily or weekly debits from that same account, continuing regardless of the business’s actual revenue, in New York’s largest documented case, regulators found the total collected, converted to an annual rate, could reach 820% of the amount advanced. Averaged across the more than 19,000 businesses covered by that one settlement, the debt canceled came to roughly $28,000 per business, a broad average across advances of very different sizes, not a single “typical” loss. When a business falls behind, the confession of judgment routes the dispute straight into a court record rather than a negotiation, and, in the most recently filed case on this page, potentially into an arbitration process regulators allege the industry itself helped design. There is no offshore movement or laundering chain in any of the cases documented here: the advance, the debit and the judgment all stay inside the same US banking and court system the business was already operating in.

By the numbers

No published dataset breaks this scheme out as its own category yet, so there is no chart to show. The data page explains which agency categories exist and why some schemes are invisible in official statistics.