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.
Jane found herself in a murky and largely unregulated corner of the financial world, which is also the fastest-growing source of funding for U.S. small businesses. One state, Connecticut, had given these lenders unusual power to go after business owners who fall behind on their debts. 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 what's called a merchant cash advance, or MCA.
Like most entrepreneurs who choose this option, she'd hoped for an emergency lifeline: After two decades and several successful businesses in her field, Jane had started a new firm right as inflation soared and 2024 election jitters sent her customers tightening their budgets. Sales were OK but not enough to turn a profit. She needed a cash infusion, but traditional banks turned her away because her company was too nascent and, so, too high-risk.
"You start to go through a little bit of a panic when payroll is coming due, rent's coming due," Jane says. She googled around and clicked on some 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.'"
The barrage came from MCA lenders, which often fill this very gap. The industry is vast and chaotic. A funder might be affiliated with a giant like Amazon or a loan shark; many are backed by Wall Street or Silicon Valley money.
Their cash comes fast — within hours — and with little paperwork. But it's costly.
"I totally let fear get in my way, and these people catered to it," Jane says.
The lump sum that she received was just under $47,000, after various fees. But she had to agree to pay back, eventually, $72,500. And a key feature of an MCA is how it gets repaid: Her lender received a cut of her sales. And it dipped directly into her bank account every day to take out $558.
Legally, there's no limit to fees on an MCA. That's because a merchant cash advance is technically not a loan but a purchase of the borrower's future sales. So most lending laws don't apply. In most 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. Her lender, which NPR is not naming to protect Jane's request for anonymity, is based in New York. But their MCA contract, on Page 9 of 21, names Connecticut as the state whose law would regulate any potential disputes.
That's because lenders there can add special language to their contracts to pull a rare and forceful lever: If they stop receiving someone's debt payments, they can direct the borrower's banks to freeze all accounts — swiftly and without judicial review — as they launch a lawsuit to collect their due.
The use of this legal tactic in Connecticut has exploded in recent years. Many MCA firms flocked there as an alternative to New York after that state tightened its laws in 2019. In a court deposition in 2022, one New York MCA lender praised the Connecticut process as "probably the most effective way of getting a merchant at least to speak to you again after they have defaulted."
On paper, a borrower can challenge their asset freeze in court. But that takes time and money — hiring a Connecticut lawyer, waiting a week or more on court procedures — all while they remain locked out of their funds. Instead, business owners tend to settle, and fast.
In 2023, Connecticut lawmakers restricted the use of that contract-language lever — it's called a prejudgment remedy waiver — for cash advances under $250,000, like Jane's. But some MCA lawyers quickly framed their own interpretation of the new statute to pursue those borrowers anyway.
Only weeks after taking out her first cash advance, Jane struggled to sleep. She picked at her food at mealtime.
Her emergency lifeline, with its daily auto-withdrawals, quickly became a trap. Like many MCA borrowers, she resorted to more cash advances — four altogether — each meant to ease the burden of the previous one.
"What happened is a snowball effect," Jane says. "When your head is spun into fear, you just see — we'll get out of this hump, we can handle this. 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 likes to joke that he's legislating himself out of business.
As a civil litigator, he has represented a growing cadre of out-of-town business owners facing debt collection by faraway MCA lenders. He quickly came to see the asset-freezing tactic as the worst abuse.
"I view the industry to be nothing less than the golden age of piracy, with the state of Connecticut becoming a main port of call," Jacobson testified in February at the state legislature, where he's now a freshman lawmaker spearheading a bill that would outlaw prejudgment remedy waivers for merchant cash advances.
At that hearing, only a handful of witnesses testified against that specific provision. Among them was attorney Jared Alfin, whose law firm has pursued hundreds of cases similar to Jane's. He argued that the legislation would discourage lenders, leaving businesses with fewer funding options.
"There's going to be no security" for funders, Alfin testified. "There's going to be very little ability for them to essentially recoup money when the merchants themselves are there to take the money and never pay it back."
Most of the opposition to the bill has focused on a different provision: The legislation would also make Connecticut the third state — after New York and California — to force MCA lenders to show their fees more like credit cards or mortgage loans, listing an estimated annual percentage rate (APR). The industry rejects this and has fought off similar proposals in other state legislatures in recent years, including in Maryland and New Jersey.
Still, even in opposing the new bill in Connecticut, one MCA group — the Revenue Based Finance Coalition, which represents funders and brokers — voiced support for the ban on prejudgment remedies. In a statement to NPR, Executive Director Mary Donohue said, "It establishes important guardrails that protect small business owners and promote a fair, balanced process."
"It spiraled for me"
Jane watched every penny earned by her business evaporate into daily and weekly debt payments. Then, in December, what seemed like a saving grace arrived out of the blue in text-message form: Are these MCA loans troubling you? "Oh heck yeah, they are," Jane thought. A firm was offering to help renegotiate her high-cost debt. We can save you money.
As a first step, the new intermediaries recommended that Jane stop communicating directly with her lenders and block her auto-payments to them. Then the firm took its fee and disappeared. By then Jane had missed enough debt payments on her original MCA — "two or more," by contract — for her lender to find her in default.
As the firm launched a collections lawsuit in Connecticut, an affidavit from the lender — a signed letter stating that she'd failed to make required payments — was sufficient 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 that 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," Jane 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 in court would go out by mail, to arrive long after her life entered crisis mode. She does not recall seeing it.
Jane borrowed from friends and scrounged to hire a lawyer in Connecticut. Within days, in January, she settled her case with a big payment to that lender. She's still in negotiations over her remaining MCAs but says her business is doing OK.
"It spiraled for me. It really did," Jane says. "By the grace of the Lord, we're coming out of it."
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," says Jacobson, the state lawmaker and lawyer.
Just over a month since his bill's introduction, it has raked in bipartisan support from more than two dozen co-sponsors, including both parties' leaders in the House. The Connecticut legislature is slated to vote on the measure before May 6.
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