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Bad Credit and the Law: The Problem of Bad Business Loans

Around the country, every year, small and medium businesses are struggling. Grills, brewpubs, bars, stores, medical and dental offices, vets, car washes, salons and barbershops, tax preparers and accountants, day cares, builders, landscapers, repair services, and a variety of other fixtures of a community can run into hard times. Expensive repairs may be needed just as the essential trained people are fully booked, or after the price of their services has spiked. Supply chain problems can cut off a small or medium business from important equipment, appliances, or other goods. As per an experienced consumer rights attorney in New York, insurance premiums can also surge. And rising rents, wiped-out consumers, competition from big-box retailers or e-commerce firms, and other factors may cause revenue to flatten out. 

Facing these difficulties and others, businesses and individuals occasionally turn to nontraditional sources of short-term financing. A merchant capital or business financing company may claim that it will buy their accounts receivable, partner with them on renovations or making payroll, or extend financing based on a business person’s good character or tax returns filed on Schedule SE or Schedule C for business or self-employment income. 

Why Bad Loan Terms May Not Be Made Clear

Responsible authorities in New York and other states argue that an industry has grown up around the desperation of small and medium businesses for some kind of partner or savior. The Office of the New York Attorney General contends that a few companies use “deception and aggressive tactics to market their loans to merchants.” Some merchants receive unsolicited phone calls or emails. Others accept offers that may seem too good to be true, such as financing with no upfront fees or costs, or a “cash advance” with little to no collateral or liability on a personal basis.  

Later on, deceptive aspects of such transactions may be revealed. The Attorney General’s office in New York alleges that transactions that may be disguised in various ways amounted to credit extended to small business “at astronomically high interest rates and over short terms, illegally charging undisclosed fees, debiting excess amounts from [owners’] bank accounts, and fraudulently obtaining judgments … by filing false affidavits in … courts.”  In 2022, the Federal Trade Commission announced that it was banning “an alleged small business financing scheme,” based on hidden fees, less financing provided than promised, etc.

Remedies for Misleading Terms in Commercial Deals

Some owners or operators of small or medium businesses may think that they have no recourse.  While consumers and victims of crime have rights, responsible and independent business owners may be on their own – caveat emptor. This, however, is not an accurate view of the law. And this is where a consumer fraud lawyer can help! 

The New York legislature has enacted several laws that protect businesses from some tactics or wrongs. False or misleading claims in the commercial sphere in New York are prohibited, for example. Such laws may not be directly intended for brokers, lenders, promoters of business opportunities, or technology vendors, but they reinforce the fundamental ethics that the New York legislature wanted to prevail in the state, in banking, finance, lending, and selling.  Billing practices, the advertising of promotional prices or rates, false testimonials or reviews, and “bait-and-switch” tactics involving unrealistic or hyped claims are covered by it.  

In addition, New York law directly regulates interest rates. As the Attorney General’s office points out that “New York law guarantees certain protections to loan borrowers, including a maximum interest rate of 16%.” When the timing and fees of certain investments or capital contributions into small and medium businesses is analyzed, rates can top 100%, however.  This, in New York, may make the capital companies responsible to repay the capital and/or profits that they made, revoke all liens or security interests they have sought or obtained on small or medium businesses’ assets, halt court orders or sheriff’s executions of judgments that interest or capital be repaid, account for all amounts taken by small or medium businesses though payments or court/sheriff action, and pay costs of litigation to the State of New York or others.

Certain tactics may also violate the common law of New York. The common law is the heritage of a free people, especially in the countries that use English alongside other languages. As the Supreme Court of the United States once observed, “the colonists who established the English colonies in this country, undoubtedly brought with them the common and statute laws of England, as they stood at the time of their emigration, so far as they were applicable to the situation and local circumstances of the colony. And among the most cherished and familiar principles of the common law was the trial by jury in civil, and still more especially in criminal cases.” The common law of New York regulates investment frauds, misleading sales offers, and advertising tactics that involve inaccurate claims or failures to disclose key things. These laws seem to have been tailor-made for the undisclosed fees that small and medium businesses suffer from in times of supply chain disruptions, forced business closures, high taxes, and slow growth.

Further, federal legislation has refined the common law in cases of large-scale commercial deals in intangibles like credit, debt, stocks, securities, options, commodities, etc. Unlike persons unrelated to one another and buying or selling land or a horse at common law, federal law may often treat the buyer of a complex financial product like the client of an attorney, or the patient of a doctor, someone to whom a higher standard of trust, fairness, and disclosure is owed. Congress often passed federal laws on the foundation of the common law, but extended or tailored it to prevent false or misleading offerings by persons servicing the accounts of others. This decision replaces caveat emptor with a policy of more complete truthfulness. 

Some credit or capital companies might argue that they are immune from the law of New York or other states because of interstate commerce or federal banking laws. Courts have held, however, that state laws regulating a wide variety of commercial activity may have an incidental effect on interstate or financial services companies without violating the exclusive spheres of Washington.  

A small or medium business may sometimes go into business with a merchant capital company thinking that the parties will help one another. The smaller company’s “reasonable expectation of profits” from the efforts of the national or multinational capital provider may trigger the federal securities laws. Like the state common law in the case of many uniform falsehoods or omissions in offering documents or sales scripts, federal statutes and rules allow a presumption or conclusion of fraud based on a financial offering persuading the market of some false thing. This may happen, for example, in cases of very high interest rates indicating that the merchant capital company acquires a virtual stake in the business and not a normal loan, for example a rate above 16%, or cases with loans with no fixed expiration or maturity date so the ‘borrower’ essentially becomes the ‘lender’s’ business partner, and a lack of a close relationship between the parties which removes the ‘friends and family’ aspect and creates an ‘promoter/investor’ context. If one party’s intention is to profit from a complex investment and the other intends to raise money using that investment vehicle to support a business on the ground, there may be a stock-like deal.

Negligence laws also exist. There may be a capital company that claims a high degree of skill, experience or trustworthiness in dealing with business receivables, accounts, payment processing, technology, or operations. These kinds of claims are like those of a broker, financial adviser, accountant, or agent who boasts of expertise or prestige in an area. If the capital company’s practices and performance fall well short of such braggadocio, a cause of action for negligence may be stated, as when the famous electronic stock-trading system NASDAQ OMX Group had to admit in a public filing that it had settled claims that “systems issues were experienced at the opening of trading of Facebook shares,” with the system paying out “all valid claims submitted” in a voluntary compensation program. The court in that case said that one financial party may owe a duty to another party in New York based on a balancing of the evidence, “including the reasonable expectations of parties and society generally, the proliferation of claims … and public policies affecting the expansion or limitation of new channels of liability.”

Next steps

As a consumer rights attorney New York, Leeds Brown Law P.C. is experienced in consumer and investor class actions. It has brought claims for false advertising, misrepresentation, unjust enrichment, securities violations, and investor-broker arbitration laws. It has been appointed class counsel and found by several courts to be competent to represent classes of similarly victimized New Yorkers. In addition, it has won praise for its professionalism during the federal court proceedings, and was separately appointed to serve on a class action executive committee in a matter involving Walmart shoppers.

It is important to know your rights when it comes to consumer goods and investment opportunities. A free consultation from a consumer fraud lawyer can help you understand your rights and take action to protect them, including by requesting a refund or restitution, filing suit, or contacting the government.