One Of The Most Devastating Court Decisions Against Merchant Cash Advances Has Been Overturned
January 29, 2020Merchant Cash Advances have sat on comfortable legal footing in New York ever since an appellate court ruled in favor of Pearl Beta Funding, LLC against Champion Auto Sales, LLC in 2018, but even so, it hasn’t stopped lawyers from trying to invalidate merchant cash advance (MCA) contracts on behalf of aggrieved customers.
That’s because an MCA provided by New York-based Merchant Funding Services LLC to a business known as Volunteer Pharmacy in 2016 was ruled by New York Supreme Court Judge David F Everett to be so “criminally usurious on its face” that the normal process required to vacate a Confession of Judgment could simply be bypassed without even having to evaluate the merits of each side’s arguments and the matter automatically won in favor of Volunteer Pharmacy. The judge’s written decision, which voided the MCA contract ab initio, was replete with a scathing opinion of MFS’s business model.
The decision quietly stunned the merchant cash advance industry. MFS understandably appealed.
Dozens of lawsuits against MCA companies in the ensuing years went on to cite Judge Everett’s decision in Volunteer Pharmacy with limited success. And while the industry sat around to find out what would happen in that case, Pearl Beta Funding, a rival to Merchant Funding Services, won an appeal of its own, the landmark usury case in March 2018 that seemingly solidified once and for all the commonly held understanding that such MCA agreements were not usurious.
Despite this, the uncertainty of Volunteer Pharmacy still lingered in the background, that is until now.
On January 29th, 2020 the Appellate Division, 2nd Department, of the Supreme Court of New York, overturned Judge Everett’s decision and ruled in favor of Merchant Funding Services. The panel of judges said they need not even weigh a lot of Everett’s contentions because he was wrong on the underlying procedural issue, that a judgment by confession could be vacated in such an instance without having to go through the normal legal process.
The ruling ultimately provides clarity on the process that determines how a judgment by confession can be vacated. One major impact is that lawyers seeking to invalidate merchant cash advance agreements will no longer have Volunteer Pharmacy as a crutch to rely on.
The Scoop Behind Sprout Funding’s Acquisition of Jet Capital
January 25, 2020News from North Texas this month as Dallas-based Sprout Funding announced its acquisition of Jet Capital. The move comes as Sprout seeks to expand its technical operations.
“Sprout built a reputation as a group that funds a lot of its own internal deals, and Jet had spent a lot of time, energy, and money on their tech platforms,” Sprout’s CEO and Founder Brad Woy told deBanked. “So while we were really good on the sales and marketing side, they seemed to be a little bit more advanced in their tech and reporting, and we brought those two things together.”
Almost all of Jet’s employees will be joining Sprout, with the exception of one person who chose to go their separate way following the merger.
Jet’s COO Allan Thompson spoke kindly of the purchase, saying in a statement that “There is a great cultural alignment in addition to the obvious benefits of combining our technology, processes and people. The result will provide increased capabilities for Sprout and opportunity for all of our customers and partners.”
The financial terms of the acquisition were not disclosed.
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How GRID Finance’s Cash Advances Are Building Stronger Irish Communities
December 27, 2019![Design Tower](https://debanked.com/wp-content/uploads/2019/12/designtower.jpg)
Five years ago, a small company in Dublin put Ireland’s fintech scene on the map by advising local SMEs to “get on the GRID.” GRID Finance, founded by Derek F Butler, introduced a peer-to-peer lending model to Irish businesses at a time when the industry was just beginning to form. From the beginning, the company’s secret sauce was the GRID Score, a proprietary credit score system that enabled the company to take on the difficult task of assessing the risk of SMEs.
Butler, who I sat down with in September at the company’s headquarters alongside Chief Marketing Officer Andrea Linehan, says the GRID Score is an SME’s “passport to the economy.”
It’s the upper tier that GRID caters to while providing a unique product within Ireland known as a cash advance. The setup is similar to Square and PayPal in the US in that the loans are repaid via a percentage of an SME’s credit/debit card transactions on a daily basis. The term of the loan is fixed and the costs are reasonable.
“The reality is that small business funding and financing is a high risk,” Linehan says.
“There’s no subprime market here,” Butler adds. “We’re trying to build a prime cash advance market versus a subprime one in the US.”
Like GRID’s competitors in the industry, Linehan believes that finance in Ireland will transition online. “Ireland is still dominated by two banks,” she says, referring to Bank of Ireland and AIB. The company, therefore, believes it has a good head start on the impending shift. But in the meantime, they’ve learned how important it is to be embedded in the local communities. To that end, GRID has an office in Limerick, Ireland’s third largest city with 95,000 people that’s located about 200km away from its headquarters in Silicon Docks.
And their mission goes beyond providing funds. “If we can help get [SMEs] ready by giving them the tips to improve their financial health right now, let’s try and do that,” Butler says. “We want them to understand their financial health versus their cost of capital.”
While the company has sustained modest growth, Business Post reported earlier this month that GRID plans to raise €100 million in 2020 to provide even more loans through its platform.
Butler likens GRID’s mission to the MetLife Foundation, promoting financial health and building stronger communities. “We do a lot of work with the MetLife foundation because of the impact they have,” he says. “It’s why I launched GRID Finance.”
deBanked Throwback Thursday
December 26, 2019As we count down the end of the decade, I thought you might want to take a glimpse of how the decade started here at deBanked. Below is a snapshot of the main merchant cash info page that was on our site in December 2010!
![debanked in 2010](https://debanked.com/wp-content/uploads/2019/12/debankedmcapage2010.jpg)
When 2010 ended, I published the following predictions for 2011:
- Businesses will increasingly face pressure on past due taxes and as a consequence would face smaller funding offers with higher costs.
- Credit card processors will venture into funding their own clients rather than rely on 3rd party MCA companies.
- Brokers will increasingly begin to fund their own deals.
- Increasing competition will create downward pressure on costs.
- It will become harder for desperate businesses to obtain funds from anywhere, including MCAs.
Might some of that be true of the recent years?????
Online Small Business Borrowing Decisions Not Driven By Costs or Disclosures, Fed Study Finds
December 23, 2019A new study on transparency conducted by the Federal Reserve on non-bank small business finance providers indicates that borrowers are not driven by costs or disclosures. The #1 reason for a business to apply with an online lender was the speed of the process, the study showed. #2 was the likelihood of being funded. Cost ranked near the bottom of the list.
While a focus group pointed out many areas that are ripe for improvement, the Fed was left to conclude that “clearer information—in the form of standardized disclosures—will not necessarily alter the decisions of some small business borrowers about whether and where to obtain financing.”
The Fed further commented that some loan applicants revealed that they had already “committed the expected loan proceeds” before a lender could even present rates and terms. Others borrowers wished they could know their approved rate and terms before even providing a lender with any data. These findings seem to undermine the potential value of enhanced uniformity in disclosures.
The report, which attempts to paint a bleak picture of online lending in spite of the data, seems to validate what online lenders have been saying all along, that speed is supreme. Even where transparency is lacking, it cannot be overstated that big banks scored lower on transparency than online lenders did.
Uncertain Terms: What Small Business Borrowers Find When Browsing Online Lender Websites evaluated BFS Capital, CAN Capital, Credibly, Fundation, Funding Circle, Kabbage, Lending Club, National Funding, OnDeck, Rapid Finance, PayPal Working Capital, and Square Capital.
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