Four Biggest Merchant Cash Advance Legal Issues to Avoid

A merchant cash advance (MCA) is becoming a more appealing alternative to traditional loans acquired from banking institutions for businesses in need of capital. MCA companies provide businesses with forwardly accessible credit in exchange for daily payments that usually last for a few months.

The growing interest in the MCA industry, by small and medium sized businesses, may eventually lead to governmental agencies incorrectly equating the MCA industry with the overly regulated consumer cash advance industry. This potentially can lead to more legislative tendencies toward the MCA industry.

Below are the four biggest merchant cash advance legal issues for a business owners to be keen of.

1. Purpose of a MCA business is to sell, not loan

The biggest legal concern is structuring the entire transaction as a sale and not a loan. Loans require costly licenses that typically involve long applications. In addition to that, the MCA business is at risk for both civil and criminal penalties if the appropriate lending licenses are not acquired. Many states have also introduced monetary fines. All of these issues may be avoided if the MCA business is selling rather than loaning.

2. Be mindful about your MCA contract

Succinctly straightforward and fair contracts are propitious for businesses than otherwise. It usually leads to more business opportunities, and may also save the MCA business in times of legal action. Extrapolating long 20 page contracts can be off-putting to potential merchants as it means using more of the merchant’s resources to review the contract, so it is imperative that the MCA business finds the right balance when drafting contracts. The lengthiness of a contract should not interfere with potential sales.

3. It is advised to stick to best practices

States have both monetary fines and other harsh penalties for businesses that provide commercial loans without the appropriate licenses. Since there aren’t many cases that address the issue of what constitutes a sale in regards to merchant cash advances against a loan, it is advised to adhere to many of the best practices mentioned above. Something like charging usurious interest rates may put you on the radar.

4. Customer satisfaction means more renewals

Customer satisfaction may lead to renewals and eventually customer loyalty. It is known that a satisfied customer will not pursue legal action, so it is best to treat merchants fairly.