Are Merchant Cash Advances Regulated?

merchant cash advance regulation

It’s common for a small business owner in need of cash to turn to a merchant cash advance (MCA). This form of alternative financing is designed to help startups, small companies, and other businesses come up with extra funds when cash flow is tight and needed fast. They’re also attractive to business owners with poor credit, as expected future revenue is the main deciding factor in approval. 

In other words, MCAs can be an easy solution to covering expenses and improving cash flow quickly. However, because they’re not considered loans, they aren’t regulated in the same way as traditional business loans. In fact, merchant cash advances are subject to few regulations at all. So before you take one, here’s what you need to know.

Guide to Merchant Cash Advance Regulation

An MCA is considered an advance on future receivables, so it’s technically not a loan. This means MCA providers aren’t held to the same laws and restrictions as traditional lenders. 

For example, merchant cash advance companies don’t have to adhere to state usury laws. These are restrictions, which vary by state, that cap how much interest a lender can charge. Excessive interest rates are considered usurious, or predatory (and illegal). But again, because MCAs are technically not loans, providers can charge just about anything they want. Since merchant cash advances come with a short repayment timeline, when expressed as an annual percentage rate, it’s common for fees to be as much as 300% APR.

That’s not to say there are no laws at all that dictate what MCA companies can do. 

Uniform Commercial Code

One type of regulation that dictates what MCA companies can do is the Uniform Commercial Code (UCC). This is a set of laws that apply to commercial transactions in the U.S. It’s not federal law, but it is universally adopted across states so that businesses can be confident that the terms of contracts they enter will be enforced the same way by courts in all jurisdictions. 

This means that the UCC could apply if there are any default issues involved in a merchant cash advance. For instance, a merchant cash advance provider could place a UCC lien against some of your business assets to secure the MCA repayment. If you don’t make your payments, they could then also take legal action to possess those assets and/or demand that your clients pay them directly instead of you through the UCC notice. On the other hand, if you pay off your MCA and the provider doesn’t remove the lien, you have the legal right to get it removed.

Small Business Borrowers’ Bill of Rights

Created by the Responsible Business Lending Coalition — a network of lenders, investors, and small business advocates — the Small Business Borrowers’ Bill of Rights is a set of fundamental financing rights that it believes all small businesses deserve. Some cash advance companies might agree to follow these rules. Under this agreement, business owners have the right to:

  • Transparent pricing and terms 
  • Non-abusive products
  • Responsible underwriting
  • Fair treatment from brokers
  • Inclusive credit access
  • Fair collection practices 

If you’re considering securing funding with an MCA, it could be a good idea to find out if the company knows and is committed to upholding these rights. Be aware that it is likely not and that you have little to no negotiation rights while requesting funding from an MCA.

Federal Trade Commission

Aside from the UCC and Small Business Borrowers’ Bill of Rights, there are other federal laws and regulatory authorities that relate to MCA operations. For example, the Federal Trade Commission (FTC) may provide oversight if a merchant cash advance company engages in certain deceptive lending practices. The FTC is responsible for enforcing federal consumer protection laws that prevent fraud, deception, and unfair business practices.

Recent Regulation Changes

The merchant cash advance industry has historically lacked regulation. The good news is that some states have pushed for more laws to reign in MCA practices.

For example, New Jersey’s Senate Commerce Committee put forth a bill to limit the use of confessions of judgments (COJs). A confession of judgment is a provision in many MCA contracts that allows the MCA funder to obtain a legal judgment against the borrower if they default without notifying them or giving them the opportunity to defend themselves in court. With a judgment, the MCA company can then freeze bank accounts, seize assets, and more. As of 2020, the new law prohibits the use of COJs in business financing contracts with New Jersey debtors.

Similarly, New York passed a law in 2019 that prohibits MCAs from filing a confession of judgment against a debtor that doesn’t reside in the state of NY. Previously, it was common for MCA companies to file a COJ in New York, even when the business was located out of state, because the courts here would usually approve them quickly and easily. (Businesses that are located in New York can still enter into COJ agreements.)

Additionally, California passed a bill in 2018 known as the California Financing Law (CFL), which covers consumer and commercial lenders. It enforces licensing and disclosure requirements, as well as limited interest and fees on certain loans. When it comes to MCAs, providers must include a cost disclosure that details the amount financed, total dollar cost, term length, number of payments, and more. This makes it more difficult for companies to disguise the true cost of an MCA behind factor rates.

The Future of MCA Regulation

Merchant cash advances and other forms of alternative business lending will only become more common as time goes on. Especially with the prevalence of online and non-bank lenders. Lately, these companies are also being scrutinized more closely by state and federal governments. 

It is likely that we will see more states pass laws that specifically govern MCAs, along with rulings from matters brought to court for lawsuits by MCA companies against borrowers who defend themselves with appropriate counsel. And there may be widespread federal regulation on the horizon that will bring more transparency to rates, fees, contracts, and more. In the meantime, it’s important to understand how MCAs work and your rights as a customer. 

Where to Find MCA Help 

Due to the lack of regulation and deceptive nature of some MCA contracts, you might assume this form of financing is a scam. MCAs are legal, but that doesn’t mean MCA providers never break the law or engage in predatory practices. Some MCA companies are better than others. So it’s important to do your research and thoroughly investigate an MCA provider before entering a contract with one. Also, be aware that many MCAs are acquired through brokers. So be sure that you work with reputable individuals at all times. 

If you’re in over your head with MCA debt and aren’t sure what to do next, we may be able to help. Tayne Law has been working with clients to resolve MCA and other business debt for over two decades. We know how to resolve MCA debt-related matters. Call us for a free, no-obligation phone consultation at (866) 890-7337, or fill out our short contact form. We’ll respond as soon as possible to discuss your options. All conversations are confidential and we never share or sell your information at any time.

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