Unlike consumer loans (e.g. auto loans, mortgages) that are regulated by state and federal laws, merchant cash advances are generally unregulated funding products. With limited legal protection to fall back on, a small business can quickly find itself in jeopardy for defaulting on a cash advance repayment.
If you are struggling under the terms of a merchant cash advance (MCA) agreement, it is wise to consult with an experienced debt relief specialist. In the meantime, this article is a brief discussion about the lack of regulatory oversight in alternative small business financings, particularly merchant cash advances.
A Merchant Cash Advance is An Advance
That statement says it all. An MCA is an advance, not a loan. When the rubber meets the road, an MCA agreement is the advance of funds to a merchant in exchange for a percentage of its future receivables. Because it is a purchase and sales transaction, an MCA is not subject to state and federal lending laws.
Currently, the Consumer Financial Protection Bureau does not have authority to regulate commercial lending or factoring, and the Federal Trade Commission (FTC) has some regulatory oversight over MCA providers under the FTC Act; however, that purview is limited to required disclosures in transaction documents and advertisements and ensuring that funders do not engage in deceptive practices.
Beyond the limited scope of the FTC Act, merchant cash advance companies are not bound by state usury laws, which limit interest rates companies can charge on consumer loans, including credit cards. It is worth noting, however, that the FTC filed a lawsuit against two MCA providers earlier this year for violating applicable provisions of the FTC Act.
MCA Regulation on the Distant Horizon
At this juncture, the outcome of the FTC’s lawsuit is uncertain, however, some state lawmakers are taking a closer look at merchant cash advances.
California, for example, is considering legislation that would require providers of commercial loans (including merchant cash advance providers) to disclose the total amount of funds borrowers will be responsible for, including all fees and charges. It doesn’t limit how much interest they can charge, however. In any event, MCAs are pegged to a factor rate, which we have discussed in a prior blog post.
Finally, in July 2020, the New York State Attorney General filed a lawsuit against three New York City-based MCA companies charging them with illegally loaning money to small business owners at astronomically-high interest rates, fraudulently charging undisclosed fees, debiting excess amounts from merchants’ bank accounts, and obtaining judgments against merchants by filing false affidavits in New York State courts.
While the matter is still pending, the FTC lawsuit, combined with the legal avenues being pursued in California and New York may be the shape of things to come. Meanwhile, small businesses will continue to tap merchant cash advances to bridge funding gaps and obtain short-term working capital.
Why This Matters
Given that merchant cash advance regulation is limited, small business owners must carefully consider their obligations under an MCA agreement: an event of default can culminate in a business bankruptcy. If your business assets are at risk of being seized, turn to the debt relief specialists at ReconcileMyMCA.com. We regularly work with small businesses to help them reconcile their merchant cash advances.