Merchant Cash Advance Future Regulations

The Issue With MCAs Providing Capital

Merchant cash advance (MCA) businesses are prone to potential future regulations. Merchant cash advance businesses produce relatively low defaults, with industry experts putting the percentage of defaults at around 15%. Even though, it is considered that 15% to be low for the MCA industry, a major issue might arise when merchants that default cannot make any further payments. While most MCA companies adhere to best practices when dealing with defaulted merchants, the recklessness of a few will lead to potential regulations for the industry as a whole.

MCA businesses are structuring their transactions as sales rather than loans. Since MCAs are not technically giving out loans, rather purchasing a merchant’s future revenue, there isn’t an extensive amount of federal oversight towards the industry. Instead of being regulated at the federal level, MCAs are being regulated at the state level under Uniform Commercial Code (UCC). (UCC is a collection of acts put together to harmonize the law of sales and many other commercial transactions in the United States.)

Best Practices Moving Forward to Avoid Regulations

Although the Uniform Commercial Code provides some form of regulation to the MCA industry, non-profit organizations like the Small Business Finance Association (SBFA) are making strides to educate policymakers and regulators. The SBFA also has a list of best practices for MCAs to follow when dealing with merchants. A few of their best practices include:

  1. Transparency

MCAs should always disclose fees, contract terms and payment policies.

  1. Responsibility

MCAs should conduct proper research and analyze any and all merchants seeking capital.

  1. Equality

MCAs should always be fair and honest with merchants.

 

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