Predatory Does Not Mean Illegal — But Some of It Is
The merchant cash advance industry contains a spectrum. At one end are funders who operate within applicable disclosure laws, price their products transparently, and collect only what the agreement authorizes. At the other end are operators who forge documents, manufacture defaults, and execute confessed judgments against businesses that never received adequate notice of what they were signing. The practices described below are not hypothetical. Each has appeared in enforcement actions, litigation records, or regulatory findings within the last several years.
Whether a given practice in your agreement crosses the line from aggressive to unlawful requires a fact-specific analysis. What this article provides is the vocabulary for that conversation.
Confession of Judgment Clauses
A confession of judgment is a contractual provision authorizing the funder to obtain a court judgment against the merchant without prior notice, hearing, or opportunity to respond. The merchant signs the confession at closing, and the funder files it upon default. In states that permit confessed judgments against out-of-state defendants, a merchant in California can find a New York judgment entered against their business before they are aware a dispute exists.
New York modified its confession of judgment statute in 2019 to prohibit their use against defendants who are not New York residents and do no business in the state. Several other states have enacted similar prohibitions. Bloomberg Businessweek’s investigation into the MCA industry documented cases where funders filed confessed judgments based on fabricated defaults and inflated amounts. The New York Attorney General’s March 2024 complaint against Yellowstone Capital and approximately thirty affiliated entities cited confession of judgment practices as a central element of the alleged misconduct.
Manufactured Default Triggers
Standard MCA agreements define default broadly. A merchant who changes their primary bank account, opens a secondary business account, or reduces monthly revenue below a defined threshold may be in default without having missed a single payment. Funders who wish to accelerate a balance and execute on collateral have, in documented cases, exploited these provisions against merchants who had no awareness that routine business decisions would trigger default.
The FTC’s October 2023 enforcement action resulting in a permanent ban against an MCA operator specifically cited the use of default triggers to seize personal and business assets from merchants who had been current on their obligations. That case demonstrated that manufactured defaults are not confined to small operators; they have been part of the business model of entities that funded substantial volumes.
UCC Lien Filing on All Business Assets
MCA funders routinely file UCC-1 financing statements that claim a security interest in all present and future receivables, and in many cases all business assets, before funding. The filing serves a legitimate purpose for the funder. It also, however, blocks subsequent financing. A business carrying an open UCC blanket lien from an MCA funder will find that commercial lenders, SBA loan programs, and equipment financing sources decline to extend credit until the lien is released or subordinated.
MCA funders have used UCC filings as a substitute for formal judgment liens, creating leverage over merchants without the procedural requirements of litigation. A filing that is never released after payoff, or that is asserted against assets beyond the scope of the original agreement, is potentially challengeable, but the challenge requires legal resources the merchant may not have at the moment the lien is most consequential.
Factor Rate Manipulation Through Broker Kickbacks
The yield spread markup described elsewhere in this series has, in its most aggressive form, involved kickback arrangements where brokers were incentivized to place merchants with specific funders regardless of whether those funders offered the merchant’s best available terms. In these arrangements, the funder pays a premium commission to the broker for delivering merchants to programs with higher factor rates or more aggressive collection terms. The merchant receives a term sheet that appears to reflect market pricing. It does not.
This practice is distinct from standard yield spread compensation. It involves the broker placing the merchant in a worse position than the market would otherwise support, for additional compensation the broker does not disclose. Where this can be proven, it may support claims for breach of fiduciary duty or fraud.
Stacking Without Disclosure of Combined Obligations
Stacking two or three MCA positions simultaneously can produce daily debt service that exceeds the merchant’s actual daily revenue. Funders and brokers who arrange stacked positions without providing the merchant with a complete picture of the combined repayment burden have, in some documented cases, effectively rendered the business insolvent from day one of the new positions. The business continues operating, the daily debits continue processing, and the funder collects until the account is empty.
A 2025 bankruptcy court filing from the Northern District of Florida examined a small business that had accumulated four concurrent MCA positions. The combined daily withdrawal exceeded the business’s average daily receipts. The court’s analysis noted that the practice of placing additional positions on a merchant already servicing active advances, without disclosure of the aggregate burden, raised significant questions about the good faith of the funders involved.
Personal Guarantee Enforcement Against Closed Businesses
MCA agreements almost universally include personal guarantees from the business owner. When a business closes, ceases operations, or files for bankruptcy, the funder’s claim against the entity may be stayed or discharged. The personal guarantee, however, survives. Collection actions against individual business owners, years after the business has closed, are a common feature of MCA default resolution. The guarantee may cover the full balance, default fees, and attorney’s fees incurred by the funder in collection.
This is not illegal. But the practice of emphasizing the business’s limited liability structure in the initial sales conversation while burying the personal guarantee provision in the agreement body has been cited by counsel representing merchants as a misleading element of the closing process.
Renewal Cycling as a Debt Trap
The renewal cycle described in relation to broker commissions functions as a debt trap in its most aggressive form. A merchant who accepts a renewal at 50% repayment resets the clock on their obligations and adds a new origination event on top of the existing balance. Over eighteen to twenty-four months, a merchant who began with a manageable advance may find themselves carrying an aggregate obligation that bears no relationship to the original funded amount. Each renewal was presented as relief. Each one compounded the problem.
Some brokers who profit from renewals have discouraged clients from seeking outside counsel before accepting renewal terms, citing speed as the reason. Speed is, in some transactions, genuine. It is also a mechanism for preventing the merchant from consulting someone who might explain what the renewal actually costs.
If any of the practices described here appear in your agreement or your experience with a funder, that is worth discussing with counsel who works in this area. Consultation is where this conversation begins.
