As we bid farewell to 2023, we continue our tradition of sharing quarterly roundups—delving into the biggest stories shaping the merchant cash advance (MCA) industry.
Today, we’re exploring the most noteworthy news from Q4 2023. You can revisit all of our 2023 quarterly reviews here: Q1 2023, Q2 2023, Q3 2023. Keep an eye out for our 2023 recap (coming soon).
From headline-grabbing MCA fraud cases to a pivotal New York court decision with potentially far-reaching implications and more, read on as we “unwrap” the stories that defined the MCA industry in the year’s closing stretch.
1. The MCA Naughty List
To begin, we shine a spotlight on recent instances of fraud and misconduct within the MCA industry. In a sector with a “right” and a “wrong” way to conduct business, these stories should serve as cautionary tales for all MCA stakeholders.
While it’s disheartening to see such practices affecting the broader MCA industry, there are a couple crucial lessons merchant cash advance providers can glean from the stories below.
Primarily, extensive verification of business/stakeholder legitimacy is paramount to prevent fraud, as is authenticating vendor accounts and financial records.
Merchants Behaving Badly
Recently, six people pleaded guilty to orchestrating a major scheme involving wire fraud and money laundering.
The defendants, led by Ryan P. Mullen, used a network of shell corporations with no actual assets to deceive Caymus Funding, a Georgia-based MCA funder. Essentially, they fabricated vendor accounts and presented counterfeit bank records to secure $6.4 million in funding. Meanwhile, Mullen played a dual role—under an alias, he posed as a broker for the same shell corporations he played a key role in establishing.
One defendant has been sentenced to 36 months of probation and more than $800K in restitution. The remaining guilty parties face potential imprisonment and equally hefty fines.
A Broker Behaving Badly
Paul Paredes, who owns a merchant processing ISO in Rochester, NY, is facing federal fraud charges plus two civil complaints.
The federal charges involve wire fraud, money laundering, and aggravated identity theft—with Paredes accused of obtaining loans through fraudulent means, using financial information from businesses he initially served.
As for the civil complaints, Channel Partners Capital LLC alleges Paredes defrauded them of $2 million. Meanwhile, Custom Teez is seeking $4.4 million in damages, accusing Paredes of identity theft, fraud, emotional distress, and breach of contract.
2. Alternative Lenders Thriving
As big banks continue tightening their purse strings on SME lending, we’re continuing to see alternative lenders stealing the show.
According to the Biz2Credit Small Business Lending Index, non-bank lenders have been on a roll, hitting a 29.9% approval rate in October—representing a consistent increase over the last 10 months. So, it seems that trust in alternative lending continues to skyrocket.
Given that MCAs are attractive to SMEs for their flexibility and accessibility, MCA providers could reasonably anticipate an imminent upswing in funding requests. However, thriving in this competitive landscape will almost certainly require funders to improve their ability to efficiently manage large volumes of applications.
3. PayPal “Down” on MCA
During PayPal’s Q3 earnings call, the company announced a significant decline in MCA and small business loan originations throughout 2023, compared to the previous year.
More specifically, PayPal’s acquisition of merchant receivables plummeted to $1.3 billion—a marked decrease from the robust $2.3 billion recorded during the same period in 2022.
In response, PayPal mentioned a tightened origination strategy for its business loans portfolio. The company also mentioned a rise in charge-offs—and attributed it to the widened acceptable risk parameters in 2022, leading to a decline in the overall credit quality of outstanding loans.
As PayPal appears to struggle, such challenges could open doors for smaller merchant cash advance players to fill the gap—especially as merchants continue to seek more reliable sources for flexible and accessible funding.
4. Shopify Capital “Up” on MCA
In Shopify’s Q3 earnings report, we got a glimpse of a surge in business loan and MCA originations—with Shopify Capital experiencing a drop in transaction and loan losses compared to the same period last year.
While Shopify didn’t disclose exact figures, it’s apparent the company continues to showcase Shopify Capital as a robust and thriving segment, able to sidestep challenges faced by competitors (such as the aforementioned PayPal).
Here, it’s important to highlight the strategic adaptability that has positioned Shopify Capital favorably in the MCA market.
Shopify’s ability to pivot and respond to changing market conditions and customer needs has been crucial. This agility, combined with a deep understanding of their customer base—primarily e-commerce retailers and small businesses—has allowed Shopify Capital to offer tailored financial solutions that resonate with their users.
As a result, Shopify Capital has not only grown its portfolio but also fortified its reputation as a reliable and responsive partner for businesses seeking alternative financing options.
MCA funders should take note.
5. MCA Litigation (and Confusion) in New York Courts
New York’s Appellate Division, Second Department, recently shook things up by ruling that an MCA agreement can be considered a criminally usurious loan.
While the New York Supreme Court initially rejected the idea in 2020 that an MCA agreement is a loan, the Second Department shifted its stance upon appeal. Their determination? Specific terms, such as absolute repayment obligations and an interest rate exceeding legal limits, can make a merchant cash advance a criminally usurious loan.
So what does this mean for the MCA industry?
Well, brace for more judicial scrutiny than ever before in New York, as well as demands for clearer industry standards. And who knows—stakeholders in the broader financial landscape may even eventually need to reshape how MCA transactions are structured. As always, time will tell.
Want to learn more about MCAs and usury law? Check out our interview with Jacob H. Nemon, partner at Carter Ledyard & Milburn.
Bonus Story: CA Wins Disclosure Lawsuit
It seems like we can’t go a single quarter without talking about MCA disclosure regulations, and Q4 2023 was no different.
In a landmark decision, Judge R. Gary Klausner ruled in favor of California’s Department of Financial Protection and Innovation (DFPI) in the case Small Business Finance Association v. DFPI.
This judgment upheld the DFPI’s newly implemented commercial financing disclosure regulations under SB 1235. These regulations mandate that providers disclose certain financial metrics to small businesses, such as the amount of funding, Annual Percentage Rate (APR), finance charge, and payment amounts. The court concluded that these disclosures are lawful under the First Amendment and are not overruled by federal law.
DFPI Commissioner Clothilde Hewlett heralded this ruling as a significant win for small business owners and consumer protection in California.
The MCA industry isn’t so sure.
Win 2024 With Onyx IQ
In Q4, the MCA landscape showed us that this relatively young industry continues to be a dynamic mix of challenges and opportunities. And to thrive in this evolving space through 2024, MCA providers will need to be extra diligent, ethical, and adaptable.
That’s where Onyx IQ comes in. We don’t just keep tabs on the significant shifts—we also support merchant cash advance providers with a cutting-edge funding platform to help them navigate change with confidence.
Automate processes. Harness data-driven decision-making. Smoothly and rapidly adapt to changes in the regulatory landscape. Enhance your decision-making prowess. It’s all possible with Onyx IQ—built for MCA funders, by MCA funders.
Ready to seize the future of MCA? Schedule a demo today, and let Onyx IQ be the driving force behind your MCA success in 2024.
P.S. – As of January 1, 2024, both Georgia and Florida have commercial finance disclosure laws that are now in effect. The Onyx IQ platform has been updated to keep our customers compliant.
