Protecting Your Business from Financial Predators: A Legal Perspective
While sufficient funding is a fundamental step in running a business, many small and medium-sized businesses (SMBs) struggle to secure fair and reasonable financing. Unfortunately, this often leaves business owners entangled with potential predatory funders whose deceptive financial products trap owners in cycles of debt. Making matters worse, some predatory debt resolution services step in when SMBs are in distress, promising relief while only deepening financial woes. Several factors contribute to the prevalence of predatory financial practices targeted at SMBs, including:
Limited Financing Options: SMBs frequently face challenges in obtaining traditional bank financing because of their limited financial track record, irregular cash flow, producing annual revenue less than $2 million and the lack of collateral demanded by most banks. These barriers are even greater in underserved areas. As a result, business owners often turn to alternative funders. Within the alternative funding industry, there exist plenty of predatory funders , whose financial products come with exceedingly high borrowing costs and unfavorable terms that tend to favor the funder beyond any reasonable means..
Lack of Financial and Contractual Knowledge: In finances, knowledge is power. From the basics of building credit and differentiating types of financing to the terms of financial agreements — an understanding of your business’ financing is crucial. A lack of knowledge creates opportunities for vulnerability.
According to Local First Arizona member Blake Wilkie of the law firm Wilkie Puchi, LLP, a business owner’s lack of contractual knowledge can lead to catastrophic financial decisions. “Many entrepreneurs do not fully comprehend aggressive provisions like personal guarantees or confession of judgment clauses, which can put their personal assets at risk,” states Wilkie. “Some debt resolution providers delay necessary actions, causing businesses to miss court dates or default further.”
Lack of Laws & Regulation: Unlike consumer lending, business lending is subject to fewer regulations, and there are few safeguards in place to prevent the deceptive lending practices targeted at SMBs. "Unfortunately, the legal system has been slow to catch up with the rise of predatory lending” says Wilke. “Businesses must be proactive in protecting themselves.”
The dangers of merchant cash advances:
Of the predatory lending practices SMBs are susceptible to, certain merchant cash advances (MCAs) are at the forefront. MCA agreements disguise sky-high financing costs as revenue-purchasing arrangements. Some common practices of these types of transactions include daily or weekly withdrawals pledging business and personal assets that can be foreclosed upon default; personal guarantees; and remedies that allow the funder to capture accounts receivables without a lawsuit being filed.
According to Wilkie, many small business owners fail to recognize the financial risks associated with what appears to be a rapid influx of cash. “These agreements are often structured in ways that make remittance nearly impossible, with rates that could be considered illegal with a traditional loan, depending on the state."
As brought to light in a recent case filed by the New York Attorney General, predatory MCA funders and brokers purporting to work on behalf of SMBs used fraudulent tactics within their contracts and made false promises to induce small businesses into cycles of unmanageable debt. While enforcement actions against bad actors help bring awareness to the community and remove these companies from the industry, legal protections for small businesses remain limited, leaving many owners unaware of their rights or options when facing financial distress and what actions to take before or after default.
Legal options for businesses caught in predatory financial schemes:
For businesses experiencing the fallout of predatory debt, seeking guidance from an experienced financial attorney is often the best course of action.
Wilkie suggests, "If a business is struggling under the weight of a merchant cash advance or other financial product, they should consult legal counsel immediately. There are often legal arguments to challenge these agreements, whether because of deceptive or unenforceable contract terms, actions from third parties or the funder before and/or after execution of the contract, or other violations of laws depending on the state."
Avoiding the Predatory Provider Trap
Don’t fall victim to exploitative financial services. SMBs can prepare themselves with resources and experts who are willing and able to help.
Bank Locally: Biz2Credit cites data that shows small banks and credit unions approve about 1 in 5 business loans, while big banks only issue loan approvals for about 1 in 8 applications. Consider working with a local bank or credit union who have a keen knowledge of local markets, rely on strong customer relationships and offer greater access to capital through relationship-based banking practices.
Consult Nonprofit Organizations: Local First Arizona offers businesses educational resources, entrepreneur support and opportunities for financial assistance, including programs with micro-loans up to $25,000.
Engage Qualified Legal Professionals: Consult with law firms like Wilkie Puchi LLP who can review contracts and offer strategic advice. Consider reaching out for professional legal guidance on predatory lending and debt resolution. By staying informed and vigilant, SMBs can protect themselves from financial predators and make sound financial decisions that support their long-term success.
Avoid Debt Settlement Companies: While some promise to reduce your debt, their methods often create more financial hardship. High upfront fees, misleading claims, and a lack of transparency are major warning signs to watch for.
Understand How Brokers and Funders Make Money: Research the structures that exist under different financial products and funder incentives to recognize potential red flags. Business owners need to be wary of deceptive financing terms and debt settlement price structures. “Debt settlement companies often charge a percentage of the debt amount, which means the larger your debt, the more you pay,” says Wilkie. Instead, business owners should look for straightforward pricing models, such as a flat fee structure, which allow a business owner to budget for legal services without worrying about fees increasing based on their debt size.
Resources for SMBs
Local First Arizona Financial Resources: Microloans and support for small businesses.
Legal Assistance: Wilkie Puchi, LLP
Expert-Backed Resources from Local First’s Local Learning Lab:
Back to Basics: Financial Readiness and Well-Being for Small Businesses
The What, How, When and Why's: Staying organized with your small business books.
Disclaimer: Please note that Local First Arizona cannot provide legal advice and is not liable for such matters. This article is solely a resource for informational purposes and does not constitute legal advice provided by Wilkie Puchi LLP. This article does not establish any attorney-client relationship.
Blake Wilkie, Esq. | Managing Principal, Wilkie Puchi LLP
Blake Wilkie specializes in creditors’ rights litigation and strategic counsel, with experience advising fintech funders in both law firm and in-house roles. He has developed collection strategies, enforcement procedures, and compliance guidance for businesses of all sizes. His litigation background, combined with in-house insight, allows him to approach legal challenges from multiple angles for effective solutions. Blake earned his J.D. from the Sandra Day O’Connor College of Law at ASU, where he was a Managing Editor of the *Arizona State Law Journal*, after graduating from ASU’s W.P. Carey School of Business.