The alarming phone call came from Jane’s daughter, away at college. Her debit card had suddenly stopped working. Something was wrong with their shared bank account. What happened to all the money?
Jane’s heart sank as she dialed her bank. The funds were still there, the bank said, but frozen — every penny, in every account. The directive came from a finance firm that had loaned to her small business. There had been no court order, no trial or hearing.
“It devastated my family and my business, with no warning, zero warning,” Jane says. “They shut down my entire life — not just my business accounts, my entire life.”
Jane runs a small firm in the medical industry in Indiana. She asked that NPR identify her by her middle name to speak candidly about her debts, which she has not disclosed to her customers, employees or industry peers. Some of her financial settlement negotiations are still ongoing.
She found herself in a murky and largely unregulated corner of finance that is also the fastest-growing source of funding for U.S. small businesses: the merchant cash advance, or MCA. One state, Connecticut, has given some lenders unusual power to go after business owners who fall behind. This spring, lawmakers plan to vote on a change.
Daily payments for emergency help
Three months earlier, in October, Jane had borrowed $50,000 through an MCA. She needed an emergency lifeline: after two decades and several successful businesses, she had started a new firm as inflation and election jitters tightened customers’ budgets. Traditional banks turned her away because her company was too new and risky.
“You start to go through a little bit of a panic when payroll is coming due, rent’s coming due,” Jane says. She googled and clicked forms. “All of a sudden, my phone just started blowing up with, ‘We can give you $100,000 — just send me your last few months of bank statements.'”
MCA lenders fill that gap. The industry is vast and chaotic: funders can be affiliated with giants or with predatory operations, and many are backed by Wall Street or Silicon Valley money. The money comes fast — within hours — and with little paperwork. But it’s costly.
The lump sum Jane received was just under $47,000 after fees. She agreed to repay $72,500. A key feature of an MCA is repayment: the lender takes a cut of sales and dips directly into the borrower’s bank account every day to withdraw $558.
Legally, there’s no limit to fees on an MCA because it’s structured as the purchase of future sales, not a loan. So most lending laws don’t apply, and in many states MCA lenders don’t have to be licensed.
“They set these small daily payments, and they seem fine — until you get into them and you start paying them,” Jane says. “And that’s when I quickly saw I made a big mistake.”
Special legal power in Connecticut
Jane lives in Indiana and her lender is based in New York. But their MCA contract named Connecticut as the governing law. That’s noteworthy because lenders there can add contract language — a prejudgment remedy waiver — that lets them, if payments stop, direct the borrower’s banks to freeze all accounts quickly and without prior judicial review while they launch a lawsuit to collect.
Use of that tactic in Connecticut has exploded in recent years after New York tightened laws in 2019. In a 2022 deposition, one lender praised Connecticut’s process as “probably the most effective way of getting a merchant at least to speak to you again after they have defaulted.”
On paper, borrowers can challenge an asset freeze in court, but that takes time and money — hiring a Connecticut lawyer and waiting through procedures — while they remain locked out of funds. Business owners often settle quickly.
In 2023, Connecticut restricted use of prejudgment remedy waivers for cash advances under $250,000. But some MCA lawyers interpreted the law in ways that let them pursue borrowers anyway.
What followed for Jane was a sleepless, anxious few months. Her emergency lifeline’s daily auto-withdrawals became a trap. Like many borrowers, she took four MCAs altogether, each meant to ease the burden of the last.
“When your head is spun into fear, you just see — we’ll get out of this hump, we can handle this,” she says. “And then when I saw that wasn’t working out, I thought, ‘Well, we’ll get to our busy time and that’ll make it up.’ And you do it again.”
The state legislature tries again
Connecticut attorney Jonathan Jacobson, who has represented many out-of-town business owners against MCA lenders, now serves in the state legislature and is sponsoring a bill to outlaw prejudgment remedy waivers for merchant cash advances. He has called the industry “the golden age of piracy” with Connecticut a main port of call.
At a legislative hearing, only a few witnesses opposed the specific provision banning prejudgment remedy waivers. Among them was attorney Jared Alfin, whose firm has pursued hundreds of similar cases. He argued the bill would discourage lenders and leave businesses with fewer funding options, warning that there would be “no security” for funders.
Much of the opposition has focused on another provision: the bill would require MCA lenders to display fees more like credit cards or mortgage loans by listing an estimated annual percentage rate (APR). The industry resists this. Still, one MCA group, the Revenue Based Finance Coalition, told NPR it supported the ban on prejudgment remedies, saying it would “establish important guardrails that protect small business owners and promote a fair, balanced process.”
“It spiraled for me”
In December, a firm texting Jane offered to help renegotiate her high-cost debt. They recommended she stop communicating with her lenders and block auto-payments. The intermediaries took their fee and disappeared. By then she’d missed “two or more” payments and was in default.
As the lender launched a collections lawsuit in Connecticut, an affidavit stating she’d failed to make payments was enough for a state marshal to direct her bank to freeze her funds because the bank had a branch in Connecticut. Without access to her money, Jane calculated her business would survive no more than 10 days.
“I wish I would have known more, I do. That was my fault — that falls on me,” she says. “After all these years in this industry and priding myself on how well I was able to lift the team and do so well, to have this happening at this stage now was extremely devastating.”
A notice informing Jane of her right to challenge the freeze would go out by mail, arriving long after her life entered crisis mode. She does not recall seeing it. She borrowed from friends and scrounged to hire a Connecticut lawyer. Within days, in January, she settled her case with a big payment to that lender. She’s still negotiating over remaining MCAs but says her business is doing OK.
“If she looked back now with a trained eye, she might have spotted the warnings midway through her MCA contract, toward the end of a full page blanketed in bolded all-caps: ‘THIS PREJUDGMENT REMEDY WAIVER MAY RESULT IN THE ATTACHMENT OF YOUR BANK ACCOUNTS WITHOUT PRIOR NOTICE OR COURT HEARING.'”
“I would say that close to 0% of the merchants who sign on to these things are even aware of what it is and what it stands for,” Jacobson says.
Just over a month since his bill’s introduction, it has drawn bipartisan support from more than two dozen co-sponsors, including both parties’ House leaders. The Connecticut legislature is slated to vote on the measure before May 6.