Merchant cash advance client sitting with attorney

Are Merchant Cash Advance Customers Consumers?

A merchant cash advance (MCA) is not a loan but the purchase and sale of future receivables in exchange for an upfront, lump-sum cash advance. Federal and state consumer laws do not strictly regulate these alternative funding products. These laws only cover natural persons and loans for personal or household purposes, such as credit cards and mortgages.

Given the widespread unfair and deceptive practices in small business lending, the Federal Trade Commission is expanding consumer protection enforcement in several business-to-business areas, including merchant cash advances. Moreover, several states have enacted disclosure requirements for these alternative funding products. Let’s look at the enhanced regulatory scrutiny of merchant cash advances.

The FTC’s Authority 

The agency’s prohibition of unfair and deceptive practices under Section 5 of the FTC Act does not expressly define or limit “consumers.” Therefore, the FTC has relied on this authority to apply the FTC Act to cases where the alleged victims are small and midsized businesses. Rather than litigation, the FTC typically pursues enforcement actions.

FTC Enforcement Actions Against MCA Providers

The FTC has brought enforcement actions involving alleged harm to businesses in several contexts, including labor practices, payment processes, small business lending, and merchant cash advances. 

In 2020, for example, the FTC took action against Yellowstone Capital, alleging several unfair and deceptive practices (UDAP) violations, including:

  • Falsely advertising MCAs do not require collateral or personal guarantees
  • Providing customers with significantly less than the total amount of financing promised
  • Failing to disclose fees
  • Making unauthorized withdrawals from customer accounts after they had fully repaid

Yellowstone and its owners settled the case for $10 million. The settlement agreement also permanently barred the company from misrepresenting its funding products and making unauthorized withdrawals from customer accounts.

In January 2022, the FTC banned Ram Capital Funding LLC (RAM) and its owner from participating in the merchant cash advance (MCA) and debt collection industries. The FTC also ordered the defendants to pay a $675,000 judgment.

State Disclosure Requirments For Merchant Cash Advances

Consumer loans have long had strict disclosure requirements at the state and federal levels, including those under TILA (the Truth-in-Lending Act). Because TILA does not apply to business loans, several states have enacted disclosure requirements for MCAs, including California, New York, Utah, and Virginia. While laws vary from state to state, MCA providers must make the following disclosures:

  • The total amount of the financing
  • The finance charge (e.g. factor rate)
  • A description of all other fees
  • The total repayment amount
  • The estimated number of payments
  • The payment amounts
  • Prepayment penalties, if any
  • Collateral requirements (e.g. personal guarantee, confession of judgment)

Although MCAs are not considered consumer loans under state laws, businesses now have certain “consumer protections” because of these disclosure requirements.

Why This Matters

The FTC and several states are looking more closely at merchant cash advances. However, MCA providers still have the upper hand over cash-strapped businesses. MCA agreements typically contain onerous provisions like confessions of judgment and personal guarantees allowing the funder to seize the owner’s assets in the event of default. 

Don’t wait for the government to come to your rescue if your business cannot repay a merchant cash advance. Turn to instead. Our debt relief specialists will work to negotiate your repayment plan with the MCA provider, help you avoid a default, and protect the business you’ve worked so hard to build. Contact us today by completing the convenient intake form.