The FTC continues policing business-to-business deception and its focus on small-business financing. On June 10, 2020, the FTC filed a Complaint in the Southern District of New York against two New York-based companies and several of their owners and officers for allegedly violating the FTC Act in connection with their business financing activities.

According to the Complaint, the defendants targeted small businesses, medical offices, non-profit organizations, and religious organizations. Since 2015, defendants allegedly deceived these consumers by misrepresenting terms of the merchant cash advances (MCAs) defendants provided, and subsequently used unfair collection practices to compel these entities to pay.

• Misrepresentations
  • Personal Guaranty of Performance — The FTC alleged that defendants’ advertising misrepresented to consumers that defendants required no personal guaranty from business owners. But defendants’ financing contracts included a “personal guaranty.”
  • No Upfront Costs — Defendants’ advertising also allegedly claimed their financing required “no upfront costs,” but defendants withheld from advances various fees initially. According to the FTC, the fees were either poorly disclosed in a contract or not disclosed at all.
  • Specific Amounts of Financing — Defendants also allegedly misrepresented the specific amount of financing to be received, by allegedly withholding fees upfront that prevented consumers from receiving the full amount of agreed-upon financing.
• Collection Practices
  • Confessions of Judgment — As a part of the contract, defendants required businesses and their owners to sign confessions of judgment, which the FTC alleges defendants used unfairly. These confessions of judgment allowed the defendants to go straight to court and obtain an uncontested judgment if there was an alleged default. Defendants allegedly filed confessions of judgment against customers in situations that were explicitly not permitted by contract, or with no relevant breach at all, and in circumstances outside of the customers’ control. These filings often led to the individual owner’s business and personal assets being seized.
  • Threat of Violence — Defendants also allegedly threatened customers when payments weren’t made. In one instance, a customer was told by defendants’ representatives they would “break his jaw” if required payments weren’t made.
  • Unauthorized Withdrawals — Defendants allegedly withdrew funds from bank accounts without the customers’ expressed informed consent.

The FTC has recently shown its intention to use its Section 5 authority to bring cases where businesses, not an individual consumer, are on the receiving end of deceptive acts by other businesses. In February 2020, FTC staff sounded the alarm on FTC enforcement and its investigations of small-business financing providers and their marketers, servicers, and collectors in a 12-page report on the FTC’s May 2019 forum on small-business financing, “Strictly Business.” The report includes several staff cautions to small-business finance providers and their service providers, including lead generators and payment processors, to help them avoid the types of conduct the FTC has alleged to be unlawful.

The FTC’s focus on small-business financing is consistent with efforts in recent years by state and federal regulators to increase oversight of small-business financing, particularly by non-bank credit providers. For example, in July 2018, the New York Department of Financial Services released a report on online lending, which concluded that “the individual owners of New York small businesses should benefit from the same protections as New York consumers.” Similarly, California passed legislation in September 2018 requiring comprehensive disclosures for various types of commercial financing in amounts of $500,000 or less.

To learn more about the FTC’s continued actions to protect business-to-business deception, check out Venable’s June 30, 2020 webinar on the topic. Click here to register!

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