Merchant Cash Advances Subject to Scrutiny by the Bankruptcy Court for the District of New Jersey

The New Jersey bankruptcy trustee overseeing the complaint for Lam Cloud Management, LLC in the United States Bankruptcy Court for the District of New Jersey argued two small business financing models: (i) merchant cash advances (“MCAs”); and (ii) small business loans originated under bank partnerships.  Our experts at discuss allegations pertaining to Merchant Cash Advance involving usury that necessitates attention from entities involved in small business lending and financing.

The complaint encompasses claims brought forward pertaining to three MCAs and one small business loan originated under bank partnerships. Faced with financial difficulties, Lam Cloud Management sought relief from several lenders. Lam Cloud Management secured the services of Synergy Capital which facilitated additional funding from CapCall, LLC after the alleged advance from Retail Capital . In each case, the complaint claims that the agreements were misleading in an attempt to mask loans bearing usurious interest.

In the case of the three purported MCA products, the primary issue is whether the Merchant Cash Advance Agreement contains elements based on business future sales or is it an actual as a loan pretending to be a merchant cash advance. A legit structured MCA is one that in which a lenders provides funds based on the business’ sales or revenue for a specific period of time or until such time as a set value has been honored by the business. A key difference between an MCA and a traditional loan is that MCAs bear the risk of uncertainty of the amount that will be repaid. MCAs may be exempt from state usury laws based on the precise structure of the MCA and the jurisdiction involved as they do not involve an absolute repayment obligation (or they may be considered not to violate rate limitations for other reasons).

  • The complaint claims that the purported MCAs were actually disguised as  loans as per the following characteristics on the agreement:
  •  the contracts were underwritten according to the business’ creditworthiness.
  •  the debtor’s principal was required to sign a personal guaranty, arguably increasing the chances that the amount advanced would be completely repaid.
  • the business was required to pay a set daily amount as opposed to what could be paid according to sales; the financing source did not bear the risk of loss from the receivables.
  • the obligation was treated as a loan in the financing source’s books.

Please note that this complaint represents only one side of the story and there is a chance that it may be dismissed for several reasons. As proponents for the regulation of MCAs,  we will be following this case very closely and bring you regular updates as they become available.