If You Don’t Make Loans, You’re Not a Lender (And definitely not a ‘direct lender’)
Small business owners in multiple states are arguing that the contracts they engaged in were loans despite the agreements specifying otherwise. In one case with multiple defendants that was filed two weeks ago in federal court, the plaintiff attached emails from the ISOs and funders they allegedly communicated with as evidence, several of which purportedly used the words “loans” or “lender.” That on its own might not be so bad except that the plaintiff entered into contracts for the purchase of future sales, in which case the words would not make sense.
While that matter and others will be litigated and decided on the merits, this should be a wake-up call for any ISO or funder that thinks the use of proper terminology is best left for lawyers and fine print in contracts. A court ordered recharacterization of a contract could have very negative consequences (if you want to know what kind, speak with an industry attorney).
Imagine working for a small ISO and one day being subpoenaed to do a deposition and potentially facing liability because of something you said on the phone or in an email. The easiest way to avoid this is to use the proper terminology at all times. If the product you sell or underwrite is a standard merchant cash advance (purchase of future sales), then it will never make sense to say loan, lender or any words related such as repay in any communication regardless of whether or not it’s with a customer or internally. Calling yourself a “direct lender” for example, is especially illogical.
If you’re at all confused, seek out your company’s manager or compliance officer for additional training. Another helpful resource is Merchant Cash Advance Basics, A certification course offered by CounselorLibrary and deBanked to help explain the differences between loans and MCAs. Given the challenges taking place in courts around the country, it’s never been more important to be knowledgeable on the products you offer.Last modified: January 19, 2017