Merchant Cash Advance Loans - Frequently Asked Questions

What is a merchant cash advance loan?

A Merchant Cash Advance (MCA) loan is a form of financing that provides businesses with a lump sum of money in exchange for a portion of their future sales. It's important to note that while commonly referred to as a "loan," an MCA technically isn't a loan in the traditional sense; it's an advance based on the credit card sales of a business.

How do Merchant Cash Advance loans work?

1. Advance Amount: The business receives an upfront sum of money from the MCA provider. This amount is based on the business's monthly sales volume or future credit card sales potential.
2. Repayment: Instead of fixed monthly payments, repayments are made by automatically taking a percentage of the business's daily credit card sales until the advance, plus fees, is repaid in full. This means that the amount paid back each day varies with the business's sales volume.
3. Factor Rate: Costs are calculated using a factor rate rather than an interest rate. Factor rates are usually expressed as a decimal figure rather than a percentage and can significantly increase the total amount you have to repay.
4. Holdback: The percentage of daily credit card sales taken towards repayment is known as the "holdback." It can vary but typically ranges from 10% to 20% of daily sales.

Are MCA loans right for your business?

Deciding whether a Merchant Cash Advance (MCA) will suit your business involves evaluating several factors. MCAs can provide quick access to capital, but they come with high costs and repayment terms that could strain your cash flow. Here are some indicators that an MCA might be a suitable option for your business:

• Need for Quick Funding: If your business needs immediate access to capital to cover unexpected expenses, take advantage of a timely opportunity, or address short-term cash flow gaps, an MCA can provide funds faster than traditional loans.
• Difficulty Securing Traditional Financing: If your business has been turned down for traditional financing due to poor credit scores, lack of collateral, or a short business history, an MCA might be more accessible since approval can be based on sales volume rather than creditworthiness.
• High Volume of Credit Card Sales: Businesses with a high volume of credit card transactions (like retail stores or restaurants) may find MCAs attractive because repayment is a percentage of daily sales, making it somewhat flexible with your business's revenue patterns.
• Ability to Manage Cash Flow with Variable Repayments: If your business's revenue is strong and you're confident in managing cash flow with variable daily repayments, an MCA might work for you. It's essential to ensure that your business can handle the daily percentage cut from your credit card sales without impacting operational costs.

What are the drawbacks to MCA loans?

• If the Cost is Too High: MCAs can be significantly more expensive than traditional loans due to high factor rates and fees. Calculate the total cost of capital and consider if the growth or benefit you expect from using the funds will outweigh this cost.
• If Your Cash Flow is Unpredictable: Since repayment is based on a percentage of daily sales, businesses with highly fluctuating sales might find repayments challenging during slower periods.
• If You Can Qualify for Less Expensive Options: If your business qualifies for other types of financing with lower interest rates and more favorable terms, those should be considered first.

Before deciding on an MCA, it's crucial to carefully review your financial situation, understand the terms of the advance, and consider how the repayment structure will affect your daily operations and cash flow. Consulting with a financial advisor or accountant can also help provide insight into the best financing options for your specific business needs.

Why is a Merchant Cash Advance legal?

A Merchant Cash Advance (MCA) is legal because it is structured as a commercial transaction rather than a loan, which subjects it to different regulations. Here are several reasons why MCAs are considered legal and are a prevalent form of business financing:

• Not Classified as Loans: MCAs are structured as the purchase of future sales at a discount, not as a loan. This means that the MCA provider is buying a portion of the business's future credit card sales, and the business is not "borrowing" money in the traditional sense. Because of this distinction, MCAs are not bound by the same regulatory frameworks that govern traditional loans and interest rates, such as usury laws that limit the amount of interest that can be charged.
• Commercial Transactions: MCAs are considered commercial transactions between businesses rather than consumer loans. As such, they are subject to commercial law and regulations, which are different and often less stringent than those governing consumer lending. This distinction allows for greater flexibility in the terms and conditions of MCAs.
• Regulatory Oversight: While MCAs are not regulated in the same way as traditional bank loans, there is some level of oversight from state and federal agencies to prevent abusive practices. However, the level of regulation can vary significantly from one jurisdiction to another, and the industry has been criticized for a lack of transparency and for charging high fees.
• Disclosure and Agreement: The legal framework for MCAs includes the requirement for clear disclosure of terms and conditions in the agreement between the MCA provider and the recipient business. This includes the amount advanced, the total amount to be repaid, the holdback percentage, and any other fees or conditions. Both parties must agree to these terms, making it a legally binding contract.
• Despite their legality, the debate over the regulation and use of MCAs continues. Critics argue for more stringent oversight to protect businesses from potentially predatory lending practices, including high costs and aggressive repayment terms. In response, some states have started to implement regulations aimed at increasing transparency and fairness in the MCA industry.

Businesses considering an MCA should carefully review all terms and conditions, understand the total cost of the advance, and consider consulting with a financial advisor to ensure it is the right choice for their situation.

Why Does Usury Not Apply To A Merchant Cash Advance?

Usury laws, which regulate the amount of interest that can be charged on a loan, do not apply to Merchant Cash Advances (MCAs) primarily because MCAs are not classified as loans. Instead, MCAs are structured as commercial transactions involving the purchase and sale of future receivables, typically credit card sales.

When Does Usury Apply?

Usury laws apply in the context of loans or credit transactions where there is a lending of money at interest rates exceeding the maximum rate that is allowed by law. These laws are designed to protect borrowers from excessively high charges and predatory lending practices. The specifics of when usury applies can vary significantly based on jurisdiction since different states or countries have their own usury statutes with varying definitions, exceptions, and maximum allowable interest rates.

How Much Interest Is Considered Usury in New York?

In New York, the general usury limit for interest rates on loans is 16% per annum. This means that charging interest at a rate exceeding 16% per annum can be considered usurious for most personal or corporate loans that do not fall under specific exemptions. If a loan's interest rate exceeds this limit, it can result in penalties, including the forfeiture of all interest on the usurious loan, and in some cases, lenders may also be subject to criminal charges if the interest rate exceeds 25% per annum.

However, there are exemptions and specific scenarios where different rates apply, such as for loans made by certain financial institutions (banks, savings banks, savings and loan associations, and credit unions) that are often exempt from state usury laws due to federal preemption or specific state exemptions. Moreover, certain types of loans, such as those related to business or commercial activities under specific circumstances, may also be subject to different rules.

Given the complexity of financial regulations and the possibility of changes in legislation, it's advisable to consult with a financial advisor or legal professional for the most current information and to understand how these laws apply to specific situations.

Do Banks Provide Merchant Cash Advance Loans?

Banks traditionally have not been the primary providers of Merchant Cash Advances (MCAs). MCAs are generally offered by alternative financing companies rather than by conventional banks. This distinction arises from the nature of MCAs themselves and the risk profile associated with them.

Do I Need A Lawyer To Get AN MCA loan?

While it's not a strict requirement to have a lawyer when obtaining a Merchant Cash Advance (MCA), consulting with one can be highly beneficial, especially for businesses unfamiliar with this type of financing. MCAs have a unique structure compared to traditional loans, and the terms can sometimes be complex and costly.