Fraud is not the exception in the merchant cash advance industry. It is the recurring condition.
The Federal Trade Commission has banned providers from the industry. The New York Attorney General has obtained a judgment exceeding one billion dollars. Bankruptcy courts across multiple jurisdictions have voided agreements, ordered restitution, permitted the recovery of prior payments as fraudulent transfers. And still the conduct continues, because the structure of the merchant cash advance, occupying its deliberate position outside the regulatory architecture of commercial lending, creates the conditions under which misrepresentation becomes not merely possible but incentivized.
The Misrepresentation Occurs at the Point of Origination
A business owner in financial distress contacts a funder, or more commonly, responds to a solicitation. The representative on the telephone describes the product in terms designed to obscure its actual cost. The factor rate is presented as a simple multiplier. A factor rate of 1.35, the representative explains, means you repay $1.35 for every dollar advanced. What the representative does not explain, and what the contract does not disclose in intelligible terms, is that a factor rate of 1.35 on a six-month remittance schedule translates to an effective annual percentage rate that may exceed 100 percent. On a four-month schedule, it may exceed 200 percent.
California addressed this particular form of opacity with SB 362, signed into law in 2025, which prohibits commercial financing providers from using the terms "interest" or "rate" in a deceptive manner and mandates disclosure of an annual percentage rate in specified circumstances. But California is one state. The merchant in Georgia, in Texas, in Ohio receives no such disclosure.
The misrepresentation is not always a false statement. Sometimes it is an architecture of omission.
Promises Contradicted by the Contract
In FTC v. Yellowstone Capital, LLC, the Commission documented a pattern in which the funder's marketing materials and verbal representations promised that business owners would not be required to provide collateral or personal guarantees. The advertisements stated this. The sales representatives repeated it. But the contracts, presented at the moment of funding when urgency and financial pressure are at their maximum, contained provisions requiring both personal liability and blanket security interests against all business assets. 7,731 businesses received refunds totaling $9.7 million.
But that figure represents one enforcement action against one provider. The practice of promising terms that contradict the written agreement is structural.
Consider the sequence. The business owner is told the advance will be $50,000. The contract states $50,000. The amount deposited into the business account is $43,000, after the deduction of origination fees, administrative charges, and in certain instances a reserve holdback, none of which were mentioned in the preceding conversation, all of which appear only in the recitals or schedules of the agreement, in language that presumes familiarity with commercial finance documentation that the average small business proprietor does not possess.
The Reconciliation Provision as Decorative Language
The central legal distinction between a merchant cash advance and a loan is the allocation of risk. In a true receivable purchase, the funder assumes the risk that the merchant's revenue will decline, because the daily remittance is calculated as a percentage of actual receivables. If the merchant earns less, the merchant remits less. If the merchant earns nothing, the merchant remits nothing. The reconciliation provision is the contractual mechanism by which this adjustment occurs.
A clause that exists only on paper protects no one. It indicts.
In Funding Metrics, LLC v. D&V Hospitality, Inc., the Supreme Court of New York, Westchester County, examined a merchant whose business was disrupted by Hurricane Matthew. The merchant requested reconciliation. The funder refused. The court, looking beyond the language of the contract to the conduct of the parties, found the reconciliation provision illusory and declared the agreement a criminally usurious loan. The distinction matters because it is the distinction upon which the entire industry's regulatory exemption depends, and when a court determines that the distinction is merely performative, the consequences extend beyond the individual agreement to the funder's entire portfolio of similarly structured transactions.
Unauthorized Debits and Continued Withdrawal
A merchant defaults. The funder's ACH authorization, which permits the automated debiting of the merchant's bank account, should terminate upon satisfaction of the purchased receivable amount or upon default and cessation of the remittance arrangement. In practice, funders have continued to debit accounts after the balance was satisfied, after the merchant notified the funder of default, after the merchant revoked ACH authorization in writing. The Yellowstone enforcement action documented precisely this conduct. The FTC found that Yellowstone continued withdrawing funds from merchant accounts for days after the obligation had been fully repaid, leaving businesses without operating capital, with the refund process extending weeks or months.
And this was a company under federal investigation at the time.
The unauthorized debit is not a mere contractual dispute. Under the Electronic Fund Transfer Act and applicable state commercial codes, the continued withdrawal of funds without authorization constitutes conversion. In certain circumstances, it constitutes theft. The merchant who discovers unexplained debits following default or satisfaction has a claim that extends beyond the receivable purchase agreement into the domain of tort and, in egregious instances, criminal referral.
The Confession of Judgment as Instrument of Coercion
Prior to the 2019 amendment of New York CPLR 3218, the confession of judgment operated as an instrument of extraordinary and, one might say, disproportionate power. The merchant, at the time of executing the receivable purchase agreement, also executed a separate document authorizing the entry of a judgment against the merchant and the personal guarantor without notice, without hearing, without the opportunity to present a defense. The funder could file this document with any New York county clerk's office and obtain an enforceable judgment, then freeze the merchant's bank accounts, all before the merchant received any indication that proceedings had commenced.
New York restricted this practice to in-state defendants. But the confession of judgment executed before 2019 remains enforceable against out-of-state merchants who signed it, and the practice of obtaining these instruments through misrepresentation of their nature and effect constitutes a distinct category of fraud. Where the funder's representative described the confession of judgment as a formality, as standard paperwork, as something that would never be used, the merchant possesses a viable claim for rescission on grounds of fraudulent inducement.
Twelve states have banned confessions of judgment entirely. New York merely limited them.
The Stacking Problem
A funder advances $30,000 against future receivables. The merchant, struggling to service the daily remittance, accepts a second advance from a different funder, then a third. Each subsequent funder files a UCC-1 lien. Each claims a security interest in the same receivables. The third funder is aware of the first two liens because the UCC filing system is a public record, and yet the third funder advances capital regardless, knowing that the merchant's revenue cannot sustain the cumulative remittance obligation, knowing that default on one or more of the advances is not merely probable but certain (a practice so common it has acquired its own terminology in the industry, where the third or fourth position funder is described as occupying the "death stack," a designation that communicates the expected outcome with admirable precision, though the expectation applies not to the funder, who has priced the risk into the factor rate, but to the merchant, who has not).
Whether the inducement to accept a subsequent advance, with knowledge of the merchant's existing obligations, constitutes fraud depends upon what was said and what was concealed. If the subsequent funder represented that the new advance would be used to consolidate or retire the prior obligations, and no such retirement occurred, the misrepresentation is straightforward. If the subsequent funder disclosed the existing liens and the merchant proceeded regardless, the claim is more attenuated.
Regulatory Momentum and Its Implications
In the winter of 2025, the New York Attorney General's office filed what became the Yellowstone billion-dollar judgment. By February 2026, the FAIR Business Practices Act extended the Attorney General's enforcement authority to scrutinize commercial financing practices as potentially unfair or abusive. The FTC had already established its position through actions against RAM Capital Funding, against RCG Advances and Jonathan Braun, who received a permanent industry ban, against Yellowstone itself.
The trajectory is clear. The regulatory apparatus is assembling itself around an industry that was constructed to exist outside of it.
For the individual merchant, this institutional momentum has immediate practical significance. A claim of fraud or misrepresentation brought against an MCA provider today is brought in a judicial and regulatory environment that is materially different from the environment of five years prior. Courts that once deferred to the contractual characterization of the transaction as a receivable purchase now examine the substance of the arrangement. Bankruptcy courts recharacterize agreements with increasing frequency. State attorneys general have demonstrated willingness to pursue enforcement at scale.
None of this guarantees a particular outcome in a particular case. What it establishes is the direction of institutional disposition.
What the Merchant Must Preserve
The merchant who suspects fraud or misrepresentation in the origination or servicing of a merchant cash advance must preserve evidence with the same discipline one would apply to the preservation of physical property in a flooding basement. Every email. Every text message. Every recorded telephone call, if recording was permitted under applicable state law. The marketing materials that accompanied the solicitation. The term sheet, if one was provided, and the final executed agreement, so that the discrepancies between the two may be documented. The bank statements reflecting the actual amount deposited versus the stated advance amount. The bank statements reflecting debits taken after default or after revocation of ACH authorization.
This documentation is the case. Without it, the claim of fraud remains an assertion. With it, the claim becomes a narrative that a court or regulatory body can follow to its conclusion.
We assist businesses in identifying and pursuing claims of fraud and misrepresentation against merchant cash advance providers, and we invite those who recognize these patterns to contact our office for an evaluation of their circumstances.