The NYAG’s action highlights various pitfalls in the MCA space, underscoring the importance of proper structuring and marketing of merchant cash advances.

By Parag Patel, Mik Bushinski, Connor Jobes, and Deric Behar

On January 22, 2025, New York Attorney General (NYAG) Letitia James announced a judgment and settlement against cash advance provider Yellowstone Capital, its officers, and two dozen affiliates (Yellowstone) for more than $1 billion for predatory loans disguised as merchant cash advances (MCAs) made to over 18,000 small businesses.

The settlement also includes barring Yellowstone from engaging in any business related to MCAs, cancels over $534 million in outstanding amounts owed by small businesses, and terminates any pending actions and liens against merchants or guarantors. Yellowstone did not admit or deny any of the allegations.

Additional lawsuits by New York and other states as well as government entities against Yellowstone successor organizations and individuals involved in the organization’s merchant financing operations are ongoing.

Loans, Merchant Cash Advances, and Illegal Lending

NYAG initially filed suit against Yellowstone in March 2024, alleging that Yellowstone made short-term loans at “sky-high” interest rates to small businesses since 2009.

With a traditional installment loan, the borrower is responsible to repay the principal over a set term, with interest (up to a statutorily-defined limit), and failure to repay the amounts due results in the borrower being in default of the loan.

MCAs are an alternative form of financing with different characteristics than traditional loans. An MCA often provides the merchant with a lump sum cash payment in exchange for a share of future business revenues (receivables). There is typically no set maturity date, and instead repayments are generally tied to the performance of the merchant’s business, often as percentage deductions of the merchant’s sales to customers. Since repayments are based on the merchant’s sales, an MCA provider usually bears the risk of poor performance of the merchant’s business — the merchant has no obligation to make repayments if it does not generate sales. In comparison, a business’s lack of sales would not alter its repayment obligations under a traditional loan arrangement.

According to the NYAG, Yellowstone offered short-term and ultra-high-interest loans deceptively represented as MCAs. Yellowstone allegedly “collected payments at fixed daily amounts, which they debited directly from merchants’ bank accounts over short repayment terms.” In some instances, Yellowstone was able to obtain court orders against certain merchants, and forced others to shutter their businesses entirely.

New York civil usury laws cap interest rates on small loans at 16% — but, according to the NYAG, some of the predatory loans serviced by Yellowstone carried rates of up to 820% per year. In the NYAG’s action against Yellowstone, the contracts are alleged to be MCAs in name only, whereas the economic and practical reality of these contracts indicated that they were loans with interest rates far above the legal limit.

Traditional Versus Alternative Financing in the Spotlight

MCAs have become a popular form of alternative financing for businesses that do not desire to, or may not be able to, access traditional loans. The global merchant cash advance market was valued at over $17 billion in 2023, and other non-traditional financing providers constitute well over $200 billion in global financing.

Many states regulate loans to small and mid-size businesses, including requiring licensure of the lender and subjecting such loans to disclosure requirements and limitations on interest rates and fees. However, MCA providers typically rely on the differences between MCAs and traditional loans as the basis for their MCAs not being subject to state lending and usury laws.

As MCAs have become more common, a growing number of states — including New York, California, and several others — have implemented laws or regulations specifically governing MCAs and other forms of sales-based financing. The rollout of legal regimes specifically focused on MCAs and other forms of sales-based financing suggests that many states recognize such forms of financing may fall outside the ambit of their lending laws applicable to traditional business loans.

Key Red Flags Highlighted by the AG

The NYAG’s complaint alleged several issues with Yellowstone’s services and business practices:

• Funding transactions falsely used MCA language (such as a “Purchase and Sale of Future Receivables”) to describe what was actually a loan agreement. The NYAG’s complaint alleges several instances of fraudulent language that made the agreements MCAs in name only, with contracts falsely referring to fixed payments as portions of actual receivables and Yellowstone taking no measures to ensure merchants understood that MCAs are not loans.
• Funding transactions were falsely labeled “open-ended” (i.e., payable over a long term, and variable based on the merchants’ receipt of revenue), when they were in fact finite terms (such as 60 or 90 business days) at a fixed rate. Rather than contracting for a percentage of a merchants’ future revenues, which can fluctuate based on the business’s actual receivables, the agreements imposed by Yellowstone required fixed recurring payments, unrelated to the merchants’ revenues.
• Funding transactions were financed at usurious interest rates, i.e., above the maximum civil usury interest rate of 16% or the maximum criminal usury interest rate of 25%.
• Hidden, undisclosed, or mischaracterized fees were charged or automatically debited from merchant accounts.
• Judgments were obtained in New York courts that were premised on false descriptions of the loan agreements or payment arrangements, with the purpose of obtaining judicial legitimacy for deceptive MCA labeling (e.g., that merchants defaulted on paying a “specified percentage” of the merchants’ revenue).
• Overcollection from merchants was a frequent occurrence, such as daily payments debited from merchants’ bank accounts even after the agreed amount was paid back in full.

While the NYAG’s complaint broadly took issue with Yellowstone’s business practices, it does not condemn MCAs more generally. The action against Yellowstone specifically cited several factors as representative of loans rather than MCAs, including the discretionary nature of basing payments on actual receivables, the refusal to permit reconciliation, failure to make good-faith estimates of receivables, failure to provide prior notice before default, and provisions authorizing collections on personal guaranty. In essence, the NYAG focused on why Yellowstone’s “MCAs” were not truly MCAs. They were in fact usurious loans, based on fixed terms with fixed repayment schedules, advertised and understood to be loans, that were falsely and deceptively dressed up as MCAs.

Conclusion

As various states continue to scrutinize MCAs, either from a legislative or enforcement perspective, MCA providers and other alternative financing providers would be well served to review their contractual arrangements and operations in light of the issues that the NYAG identified in the Yellowstone complaint.