In December 2020, New York Governor Andrew Cuomo signed legislation amending the New York Financial Services Law by requiring non-banks, including merchant cash advance companies, to provide small businesses with disclosures similar to those required under the Truth-in-Lending Act (TILA).
The new disclosure requirement, which becomes effective on June, 21 2021, is an indication that enhanced regulation is coming to the merchant cash advance (MCA) marketplace. Until then, small businesses struggling to protect their rights under the terms of an MCA agreement should consult with an experienced debt relief specialist. Let’s take a look at the new disclosure requirements for alternative funding products in New York.
New Alternative Funding Disclosure Rules
The new disclosure requirements apply to commercial financing transactions, including factoring and sales-based financings such as merchant cash advances. As of the effective date, covered alternative finance companies (including MCA providers) must provide disclosures to small businesses at any point in an application where a specific financing offer is extended.
Generally, an MCA disclosure must include:
- The total amount of the advance
- The disbursement amount
- The factor rate
- The estimated APR (Annual Percentage Rate)
- The total repayment amount
- The estimated term
- The payment amounts
- All fees and charges
- A description of security interests
With respect to the APR disclosure, MCA providers can rely on one of two methods for calculating the APR: the historical method or opt-in method. Funders must select one option for all transactions, however, and inform the Superintendent of Banks which method is being used.
Also, MCA providers that use the opt-in method must report data to the superintendent annually and undergo a review process.
The superintendent’s office is tasked with providing a form disclosure as well as further details about the review process for the opt-in method. In the meantime, merchant cash advance companies and other alternative funders need to begin reviewing their procedures now to put the required disclosures in place.
Finally, small businesses that rely on merchant cash advances will have greater legal protections as of June 2021. In particular, the new disclosure law provides greater clarity about the cost of financing by requiring MCA providers to disclose the estimated APR, which is a multiple of the factor rate.
Why This Matters
Despite the new disclosure requirement, the risk of default for cash advances is high, which makes it essential to consult with an experienced debt relief specialist. ReconcileMyMCA.com regularly helps small businesses nationwide reconcile their cash advances.
While MCA agreements typically involve onerous payment terms, Confessions of Judgment, and personal guarantees, a well-conceived agreement will a reconciliation clause that requires the provider to restructure the repayment plan in the event of a receivables shortfall.
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