Alternative commercial financing can offer a vital lifeline for small businesses trying to secure quick capital. However, when hidden fees and steep interest rates stack up, those financial lifelines can turn into costly legal battles. BHG Financial is one of the more common alternative business loans that we have seen in collection and litigation in the last few years.
In a notable commercial lending dispute—A&C Gaming, LLC v. BHG Financial, LLC—a gaming café startup successfully challenged alternative lender BHG Financial over claims of usurious lending and deceptive fees. The lawsuit sheds light on how commercial lenders structure upfront costs and what business owners need to look out for in business financing agreements.
The Dispute: How Hidden Fees Triggered a Usury Lawsuit
When A&C Gaming sought capital to launch a gaming café in North Carolina, it secured a loan through BHG Financial. To close the deal, BHG issued a promissory note for $267,050. However, upon funding, BHG withheld $20,050 in transaction and origination fees upfront, leaving the business with significantly less cash in hand than the total face value of the loan.
When A&C Gaming and its founders examined the net financial impact, they filed suit in federal court alleging two primary violations:
- Usury Violation: By factoring the $20,050 in deducted fees back into the actual capital disbursed over the 10-year repayment schedule, the loan's effective annual interest rate soared to 18.24%—violating North Carolina’s statutory limits on allowable interest.
- Unfair and Deceptive Trade Practices: The company argued that charging exorbitant fees without reducing interest, alongside requiring improper spousal guarantees under the Equal Credit Opportunity Act (ECOA), constituted unfair commercial practices.
Federal Court Refuses to Toss Usury Claims
BHG Financial moved to dismiss the lawsuit, arguing that the contract terms were standard for commercial credit agreements. However, U.S. District Judge Terrence W. Boyle rejected BHG's arguments, establishing two critical takeaways for the commercial lending industry:
- Fees Count Toward the Interest Rate: Under established North Carolina legal precedent, when a lender withholds origination or transaction fees upfront without reducing the total interest charged, courts will include those withheld amounts when calculating the loan's effective interest rate.
- Commercial Loans Aren't Immune to Usury Laws: While business loans often face less regulation than consumer loans, lenders cannot use heavy fee structures to bypass state-mandated maximum interest caps.
Following the court's refusal to dismiss the usury and unfair trade practice claims, the parties reached a settlement to resolve the dispute.
The settlement highlights growing legal scrutiny surrounding commercial lenders who charge substantial upfront fees.
1. Calculate the Effective APR, Not Just the Stated Rate
A loan agreement might advertise a legal or reasonable interest rate on paper. However, if the lender deducts 5% to 10% of the loan amount in "origination," "administrative," or "underwriting" fees before disbursing funds, your real borrowing costs are much higher.
2. Watch Out for Personal Guarantees and ECOA Violations
Commercial lenders routinely require personal guarantors. However, federal law restricts lenders from automatically forcing a business owner's spouse to co-sign unless specific financial criteria are met.
3. Know Your State’s Commercial Usury Caps
Usury laws vary significantly from state to state. If a lender’s fee structure pushes the effective yield above state limits, business borrowers may have grounds to challenge the validity of the debt or negotiate
The resolution of the A&C Gaming v. BHG Financial suit serves as a cautionary tale for small business owners reviewing financing offers. Always calculate the net funds you will receive after fees and verify that the effective annual borrowing costs comply with applicable state laws. If you suspect a commercial financing agreement contains predatory terms or excessive fee structures, consult with a qualified commercial debt attorney to review your options.
If the matter does proceed to litigation, this case is the perfect example of showing how necessary affirmative defenses and counterclaims such as the ones discussed above can shift leverage toward the business or consumer putting them in a superior position to settle the matter out of court for significantly less or even pressure a lender such as BHG to dismiss the matter in lieu of risking a damaging decision against them in court.