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Self Funded In House Financing Can Present Legal Snares

What legally defines a merchant who uses a self-funded, in-house financing program?  Any merchant extending credit of any kind to one or more of their customers is this type of merchant, whether they realize it or not.


They may be running an in-house financing program using their own money, or they may simply be allowing a customer they’ve known for years to pay a few days late which constitutes extending financing.  This is a really easy set of jurisdictions to fall into and it’s very dangerous to a business and to the merchant’s personal finances.


If you are running your own financing program and haven’t done your legal homework, then the legal points at the end of this page will be well worth your time.  Without realizing it, these businesses have put themselves in a position to lose their business, and in most cases everything they personally own.  Let us explain.


When looking at the risk of running a self-funded consumer financing program, the key risk phrase most businesses focus on is “self-funded”, the concern being that if someone doesn’t pay they’ll be out the funds that they put into the financing deal with that customer.  However, the real danger is so much larger, lying hidden beneath the obvious.


Consider the jurisdictions a business enters into and the liability that goes with that when running an in-house financing program.  How litigious are people these days?  How strong is the merchant on discrimination law and fair lending compliance?  How easily could the merchant do something illegal without realizing it?


If the merchant gets sued how well are they personally protected so that the merchant’s personal assets are safe from attack?  Most merchants are poised to lose everything without realizing it.


Let’s look at the legal liabilities.  Here are some recommendations from the U.S. Government (The following information is provided for educational purposes and does not constitute legal advise.  Always consult with an attorney or other competent professional who can advise you on the best actions to take and explain and answer questions about your concerns.)


There are a surprising number of jurisdictions in-house financing companies find themselves in.  If you become a finance company, you’ll find yourself subject to these jurisdictions as well.


The major areas or concern are linked below.  Most business owners and/or managers aren’t even aware of many of sets of law these links will take you to.  Please review them carefully and seek legal advise as needed.Business Info and USA.GOV

Before reading on, please realize that there is one very simple solution to avoiding all of the complications involved with learning and complying with the various bodies of law mentioned below, and being made subject to them at all:  Don’t become your own self-funded customer finance company.


If you must offer a payment plan to customers who do not have a credit card or cannot get traditional financing, you should use a third part, like eFund Systems, who shields ALL this liability for you.


Any expense associated with using a third party is negligible compared to the consequences of losing a civil lawsuit or facing criminal charges due to non-compliance with any of the laws your business could become subject to.  Remember, Lawyers Are Standing By.



Financial and banking jurisdiction for licensing and compliance – New laws went into place in 2009 and 2010 with more no doubt on the way in 2011 that have added strong restrictions, requirements, and penalties for failure to comply.  Some of these include penalties of up to $25,000.00 per day for being out of compliance. 

Some of these include the Credit Practices Rule, the Truth In Lending Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and the Equal Credit Opportunity Act, and those are just the big ones on a national level.  There are other national jurisdictions and many state, county, and local consumer protection laws and ordinances that may apply as well.  Basically, it’s a nightmare if you aren’t very careful.


Privacy law compliance and liability – These laws have been in place for years, but have been updated recently.  Some of the big areas of Privacy Law are Identity Theft Liability, properly Using Consumer Credit Reports, Privacy Rules for Financial Companies, and Computer and Information Security.


Collection law compliance and liability – Lawyers are standing by to sue your pants off right now!  Don’t give them the chance!  Either know the Fair Credit Billing Act and the Fair Debt Collection Practices Act (with all the bankruptcy subsections) plus all the state, county, and local laws and ordinances, or don’t play the game!


Discrimination liability – A coherent, consistent credit criteria policy that is strictly enforced and adhered to is your best defense here.  Does your business have one?  If so is it compliant with the law?  How do you know?  Did your attorney team look it over?  Hopefully it does not allow for arbitrary decision making at any point.  Are you prepared to make your policy available to anyone who asks to review it? 

If you do not have a tight, bulletproof lending & credit policy in place that you strictly adhere to then you must extend credit equally to everyone without regard to any conditions, such as their credit, income, etc to avoid lawsuit, and that simply isn’t prudent to do.

The Fair Credit Billing Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act are all in place to protect consumers and Lawyers Are Standing By.

Some merchants have actually told us, “We don’t try to attract THOSE types of customers.”  Really?  Why not?  Does their money not spend as well as any other money?  “If there were no risk to you, would you then be interested in earning the money of “THOSE” types of customers?  Most merchants don’t realize they’ve made a discriminatory statement when they say things like, and anyone overhearing it can sue them.


Entity protection can be critical for any of the above issues if the merchant gets sued.  If the merchant is a sole proprietor or in a general partnership then anyone suing them is not only able to attack the business assets, but the personal assets of the sole proprietor or all general partners. 

Incorporation, whether it’s a “C” corp, an “S” corp, LLC, Professional Corp or other incorporated entity sets into place the “corporate veil” to separate the business from the person so that personal assets cannot be gotten at through a lawsuit (unless you live in California where it’s virtually powerless, sorry). 

Still, merchants are often vulnerable and have no ability to take advantage of the corporate veil because of lack of correct record keeping, procedure, and especially co-mingling of funds.  The point is that if you, the business owner and/or manager put yourself out there as a target in any of the above areas, you’re likely risking your business and all of your personal assets as well.  We strongly recommend you consult with an attorney and CPA to discuss your business structure to protect both your business and yourself from liability.



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Comment by Ralph Paglia on January 1, 2018 at 4:53am

I received the following message regarding the above article from a reader of this blog with a corrected hyperlink:

"Hi Ralph,

I noticed you have a link to which has moved under so I thought I’d shoot you a quick email about this in case you wanted to update it.

The link is here - linked as ‘Using Consumer Credit Reports’ if that helps you find it.

Also, perhaps you’d be interested in our site as well? We’re dedicated to helping small businesses (

We review tools all small businesses need and publish a library of content to help small business owners make the most of the Internet.

We have a lot of useful articles including basics like how to come up with a name and business planning to creating a website, getting customers and finding sources of business finance.

If you think your visitors would find our site useful perhaps you could update your page to link to us as well? I think it will supplement the information that provides.

Please let me know your thoughts.


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