Indiana Business Owner's Accounts Frozen Without Warning Due to Merchant Cash Advance
Jane, a small business owner in Indiana, experienced a devastating turn when her bank accounts were frozen without prior warning. This drastic action followed an agreement with a finance firm providing a merchant cash advance (MCA), and the directive to freeze funds came directly from the lender, not a court order. Jane stated that her "entire life" was shut down, a significant blow to both her business and personal finances.
"Her 'entire life' was shut down."
Merchant Cash Advances Explained
In October, Jane borrowed $50,000 through an MCA. Traditional banks had declined her due to her company's newness, making MCAs a viable, albeit costly, alternative. MCAs are a rapidly growing funding source for U.S. small businesses, known for offering quick cash with minimal paperwork.
Jane ultimately received approximately $47,000 after fees and was obligated to repay $72,500. A defining feature of MCAs is their daily repayment structure: the lender takes a portion of sales directly from the borrower's bank account. For Jane, this amounted to a steep $558 daily.
MCAs are legally structured as a purchase of future sales rather than a traditional loan. This distinction is crucial, as it exempts them from most lending laws and fee limits. Consequently, in most states, MCA lenders do not require specific licensing. Jane reported that these daily payments quickly became unmanageable, leading her to take out additional MCAs, creating a "snowball effect."
Connecticut's Legal Provision: A Lender's Leverage
Although Jane resides in Indiana and her lender is based in New York, their MCA contract specified Connecticut law for dispute resolution. Connecticut law allows lenders to include a "prejudgment remedy waiver" in contracts.
This powerful provision enables lenders to direct banks to freeze a borrower's accounts swiftly and without prior judicial review if debt payments cease, even as they initiate a lawsuit to recover funds. The use of this legal tactic has surged in Connecticut, particularly after New York tightened its lending laws in 2019. Lenders often describe the Connecticut process as an effective method to compel defaulting merchants to engage in repayment discussions. While borrowers can challenge these freezes in court, the process is time-consuming and expensive, frequently leading to rapid settlements.
In 2023, Connecticut lawmakers restricted the use of prejudgment remedy waivers for cash advances under $250,000. However, some MCA lawyers have interpreted the new statute in ways that continue to allow its application to such borrowers.
Impact and Legislative Response
Jane's accounts were frozen after she defaulted on payments, a decision made after receiving advice from a third-party firm offering to renegotiate her debt, which subsequently disappeared after taking a fee. An affidavit from her lender was sufficient for a state marshal to order her bank, which had a branch in Connecticut, to freeze her funds. Jane settled her case with the lender within days in January, borrowing from friends to hire a lawyer. She is currently negotiating her remaining MCAs.
Connecticut attorney and freshman lawmaker Jonathan Jacobson is now sponsoring a bill to outlaw prejudgment remedy waivers for merchant cash advances. He testified that the industry's practices, especially the asset-freezing tactic, represent "the golden age of piracy."
"The golden age of piracy."
While some, like attorney Jared Alfin, argue that such legislation would reduce lender security and funding options for businesses, the Revenue Based Finance Coalition has expressed support for the ban on prejudgment remedies, citing the need for "important guardrails."
The proposed bill also aims to make Connecticut the third state, after New York and California, to require MCA lenders to disclose estimated annual percentage rates (APR), similar to credit cards or mortgage loans. The industry has generally opposed APR disclosure in other states. The bill has garnered bipartisan support and is scheduled for a vote in the Connecticut legislature before May 6.