The NY Times published the findings of their investigation into the commutation of Jonathan Braun who was serving 10 years in prison for running a massive marijuana ring but also had been widely known for being what they call a 'predatory lender' in the merchant cash advance industry. Other major news networks have picked up the story which will continue to shine light on the industry. In October we wrote about how he was permanently banned from the MCA industry by the Federal Trade Commission (FTC) and now new information has been uncovered on the details of the pardon. I will cover some notable details plus what the writers got wrong about how they described the MCA product and the industry.
The drug crimes
Jonathan Braun's journey to obtaining a last-minute commutation started in 2009. This was after the Brooklyn U.S. attorney's office, in collaboration with the Drug Enforcement Administration, raided a location they identified as a storage site for a marijuana trafficking operation led by Braun, as described in the New York Times.
Learning of the raid, Braun took immediate action. He embarked on a non-stop 25-hour drive from Florida to a Native American reservation in upstate New York. There, clad entirely in black, he covertly crossed into Canada, as detailed in legal documents. Subsequently, Braun escaped to Israel.
The U.S. Justice Department responded by placing Braun on a special Interpol watch list, requesting Israeli authorities to detain him. By 2010, Braun had returned to New York, faced charges from the Justice Department, and was incarcerated.
The pardon
We know pardons happen in every administration for convicted criminals so it's not a big surprise that someone with Brauns type of conviction was pardoned. However, Jonathan Braun was also being investigated for financial crimes related to his funding businesses. Per the NY Times, the Justice Department officials were seeking to have Braun cooperate to expose other lenders whom they were investigating for criminal behavior in exchange for being released from prison. Although Braun denies that, his father was reaching out to the Kushner family, Donald Trump's son-in-law, to seek release from prison via a pardon. The two fathers knew each other.
Once pardoned and released Jon Braun went back into funding small businesses across America while using the same tactics which got him in trouble. The justice department then had no leverage on Braun to cooperate which really hurt its investigation into other funding companies. Some may breathe a sigh of relief at that information while most of us would want to eliminate the funding companies that continue to take advantage of business owners in a criminal way.
What they got wrong
Some things that the NY Times and other mainstream writers that write about the merchant cash advance industry, also called revenue based financing, and product get wrong are really a problem for every stakeholder so it's important to call attention to it.
In the article, the NY Times uses terms like merchant cash advance "dealers", "predatory lenders", and "loan sharks' to describe the overall industry and individuals. The term 'dealer' seems to be used to portray an even worse image, like that of a drug dealer not of a car dealer, when considering that they classify basically every company that offers the merchant cash advance product as a predatory lender. To be clear while there are many companies out there that this term could apply to, these broad strokes aren't an accurate portrayal of all funders.
MCA companies should be referred to as 'Funders' given the history of cases before courts. Merchant cash advance funders are not lenders because an MCA is not a loan. The NY Times does note the legal definition of the MCA product briefly but they don't provide context around the product and it creates the perception that every MCA company is the same.
Large fintechs like Paypal, Block, and Shopify offer a merchant cash advance product
and others like Stripe (see image right) offer essentially the same structure of an MCA but are legally classified as a loan for a number of reasons including being backed by a bank that funds the loans.
What is the major difference?
The cost of capital. Yes many MCA funding companies charge high Factor Rates, not interest rates, but the previously mentioned fintechs and others have factor rates in the teens. The conversion to an APR is never perfect and this is, in fact, a legal issue in California right now, but one can safely say that a factor rate of 1.15 over an expected 12 months' payback with no additional fees is approximately equal to a 15% APR. Again, this is to provide context to those that offer an MCA product. The cost of capital is a set amount, not a simple interest rate that is incurring interest charges monthly.
To further give context, I would make the comparison to credit cards, business or personal, where there are low-interest credit cards and high-interest and fee credit cards. Not all high-interest credit cards are bad but they can be if used improperly.
Also, the product is not solely for business owners in trouble or who cannot qualify for other loan products. Many highly credit-worthy merchants use advances for specific timely needs.
So when writing about all the bad about the product, writers need to do more research and be more cognizant of how it's portrayed to business owners who could then miss out on opportunities because they fear being ripped off by a funding company. There are reasonable opportunities out there for funding through this product and some are even better than traditional banks if you consider the time it takes if a business owner could even get approved. Opportunity cost is the key for any business owner.
Whats next
The new details from the TImes' investigation are intriguing but what is the impact on the merchant cash advance industry?
Well, it seems that justice officials from New York and likely other states are investigating MCA funders as you read this. There will likely be more fallout from these investigations and publicity of Braun's pardon, which is now being covered by Rollingstone, MSBNC, and others. This will impact lawmakers from states that have not recently put in place laws for commercial finance regulation.
In my opinion, this is not necessarily a bad thing. But I will defend those doing business above board as long as small business owners around the country are benefitting when needed.
Read the NY Times Article HERE
Thanks for your objective response, as always.