What to Do if You Were Misled Into a Merchant Cash Advance

You were told it was not a loan. That distinction, repeated by the broker on the telephone, printed in the first paragraph of the agreement, embedded in the FAQ on the funder's website, was the premise upon which the entire transaction rested. The premise was false. And the falsehood was not incidental to the arrangement. It was the arrangement.

A merchant cash advance that misrepresents its nature, its terms, or its collection mechanisms is not merely a bad deal. It is an instrument of deception that courts, regulators, and attorneys general have begun to dismantle with increasing precision.

The pattern recurs with such consistency that it constitutes something closer to an industry practice than an isolated failure of disclosure. A business owner in need of capital receives a telephone solicitation or responds to an online advertisement. The representative describes the product as a purchase of future receivables. The representative explains that repayment adjusts with revenue, that there is no fixed obligation, that the arrangement carries none of the risks associated with traditional lending. The representative does not mention the effective annual interest rate. The representative does not explain that daily withdrawals will be fixed, regardless of what the business earns on any particular Tuesday in November.

The agreement arrives by email. It is 30 pages, or 37, or 42. It contains a reconciliation clause that appears to confirm what the representative described. It contains a confession of judgment clause that contradicts everything the representative described. The merchant signs. The capital appears in the account. The daily withdrawals begin the following morning.

What was the merchant told. What does the agreement say. Where those two things diverge, a cause of action exists.

A claim of fraudulent inducement requires that the merchant identify the misrepresentation, demonstrate reliance, and establish that the misrepresentation was material to the decision to enter the agreement. In the merchant cash advance context, the misrepresentation is often the product itself. The merchant was told the arrangement was not a loan. If a court determines that it was a loan, then the central representation upon which the merchant relied was false.

But fraud requires more than inaccuracy. It requires intent, or at minimum, reckless disregard for the truth. The broker who describes a fixed daily withdrawal as a "flexible payment based on your sales" is not making a technical error. The funder whose reconciliation clause has never been honored for any merchant in the portfolio's history is not operating in good faith. The sales representative who omits any reference to the personal guarantee while emphasizing the limited-risk nature of the product is constructing a false impression with deliberation.

In People v. Richmond Capital Group, LLC, Justice Borrok found that reconciliation provisions were "a sham to make the agreement purportedly look like the purchase of future receivables in order to step away from the criminal usury law." That finding did not emerge from ambiguity. It emerged from a pattern of conduct so consistent that the court treated it as evidence of intent.

And this complicates the picture. Many merchants interact with brokers alone, parties who operate apart from the funding company. The broker earns a commission upon closing. The broker has no obligation to the merchant after the agreement is executed. The broker may have made representations that the funder would disclaim if asked.

That separation is strategic. It creates a gap between the party who made the promise and the party who holds the contract. But courts have addressed this structure before, in insurance, in securities, in mortgage origination. The principal who benefits from the agent's misrepresentation does not escape liability by asserting ignorance of the agent's methods. The doctrine of apparent authority applies. The doctrine of ratification applies. The funder who accepted the merchant's signature on an agreement procured through the broker's false statements ratified those statements by accepting the benefit they produced.

The gap is not as wide as it appears.

Even where the formation of the agreement does not support a fraud claim, the enforcement of the agreement may generate independent causes of action. The FTC's case against Jonathan Braun and RCG Advances involved collection practices that included threats of physical violence, misrepresentation of amounts owed, and the seizure of personal assets unrelated to the business. The court entered a $20.3 million judgment. Braun received a permanent ban from the industry.

That case represents the extreme. But between the extreme and the permissible lies a broad territory of coercive collection conduct that merchants experience and do not report: telephone calls to family members, contact with the merchant's customers, threats to file criminal complaints for fraud when the merchant's sole transgression was insufficient revenue to meet a fixed daily withdrawal.

Since February 2026, New York's FAIR Business Practices Act extends protection to small businesses against abusive acts in commercial transactions. The Attorney General may now investigate and prosecute collection tactics that were once beyond the reach of consumer protection statutes. The definition of "abusive" under the FAIR Act includes conduct that takes unreasonable advantage of a person's inability to protect their own interests. For a merchant whose operating account is being drained by daily withdrawals while the funder refuses to reconcile, that definition has immediate application.

Documentation determines the outcome. The merchant who was misled into a merchant cash advance should preserve every communication with the broker and the funder: emails, text messages, recorded telephone calls where the jurisdiction permits, the original advertisement or solicitation that initiated the relationship. The merchant should preserve the agreement itself, including all addenda, amendments, and any correspondence regarding reconciliation requests.

Twelve weeks after execution, request reconciliation in writing. Retain the request. Retain the response, or retain the absence of a response. That silence is not neutral. In litigation, it becomes evidence that the reconciliation provision was never operational, which is the predicate for recharacterization, which is the predicate for voiding the agreement.

The sequence matters. The documentation of the sequence matters more.

The New York Attorney General's $1.065 billion settlement with Yellowstone Capital in January 2025 cancelled $534 million in merchant debt across more than 18,000 businesses. The settlement vacated collection judgments. It terminated liens. It distributed $16.1 million in restitution. The Attorney General's investigation found that the Yellowstone entities had operated a fraudulent lending scheme disguised as merchant cash advance transactions, with interest rates the office characterized as astronomical.

That settlement was not an act of mercy. It was an act of enforcement against an industry participant that had operated for years under the assumption that the merchant cash advance structure was legally impenetrable. The assumption was incorrect.

If one's funder still operates, and one's agreement mirrors the structures that Yellowstone employed, the settlement is not merely historical. It is precedent in the form of a billion-dollar concession.

A merchant who has been sued by a funder for breach of a merchant cash advance agreement is not limited to defense. The merchant may assert counterclaims for fraudulent inducement, for violation of state usury statutes, for unconscionability, for violation of the FAIR Act, for unjust enrichment. The counterclaim transforms the litigation from a collection action into an examination of the agreement's legitimacy.

Funders prefer collection actions. Collection actions are fast, procedural, and resolved on the paper. Counterclaims introduce discovery. Discovery introduces the funder's internal communications, its reconciliation records, its broker compensation structure, its treatment of other merchants who requested adjustments. The funder that has never honored a reconciliation request will produce records that demonstrate exactly that. The funder that instructed brokers to minimize discussion of the personal guarantee will produce training materials that confirm the instruction.

Merchants wait. This is understandable and destructive. The daily withdrawals create a condition of financial exhaustion that makes the prospect of litigation feel impossible, which is precisely the condition the withdrawal structure was designed to produce. A merchant who waits until the account is empty has fewer options than a merchant who acts while capital remains.

Statutes of limitation apply to fraud claims, to usury claims, to unconscionability defenses raised affirmatively rather than defensively. The merchant who recognizes the misrepresentation in month three occupies a different legal position than the merchant who recognizes it in year three. The difference is not merely strategic. It is jurisdictional.

We have observed this pattern across hundreds of consultations. The merchant who calls in the first 90 days retains the capacity to seek injunctive relief, to halt withdrawals, to preserve the operating capital that makes continued business operation possible. The merchant who calls after the account has been depleted seeks recovery rather than prevention. Both are available. One is preferable.

The agreement on your desk or in your inbox is not a sealed fate. It is a document, subject to the same scrutiny as any other instrument that purports to bind one party to terms that another party misrepresented. The courts have demonstrated a willingness to void these agreements. The regulators have demonstrated a willingness to pursue the entities that produce them. What remains is the decision to act, and that decision belongs to the merchant who was told one thing and delivered another.