Is Merchant Cash Advance Legal?

If merchant cash advances (MCAs) are so bad for your business, you might wonder if, how, and why they’re legal. Those questions can be tricky to answer because there’s a lack of consensus on MCA regulation across the country. While they may be legal in some states, they’re not in others. 

So how do you know what’s legal, what’s not, and when to call for help? We’ll fill you in. 

Are Merchant Cash Advances Legal?

Merchant cash advances are considered legal IF they meet a variety of specific characteristics — which on paper they might, but in practice they rarely meet. The end result can vary based on your state or legal jurisdiction, but most importantly on the behavior of the MCA company and you as the borrower.

To get a full understanding, it’s best to get some background. Before 2022, MCA companies had multiple rulling go their way, but during this past year, the pendulum has swung in favor of business owners. The following three major federal rulings all involve RICO (Racketeer Influenced Corrupt Organizations) claims, which are especially damning: 

• Fleetwood Servs. v. Ram Capital Funding, LLC concluded that the MCA agreement was a loan — not a contract for future receivables.
• Haymount Urgent Care PC v. GoFund Advance, LLC stated the defendants were liable under RICO for operating a business that “loans money to small businesses at criminally usurious interest rates and then uses various improper tactics to collect on those loans.”
• Lateral Recovery LLC v. Queen Funding, LLC analyzed RICO allegations based on previous usury claims and unveiled sufficient evidence to show MCA transactions were subject to usury laws.

Read this article for a further explanation of these cases and their rulings. 

What does this mean? While MCAs may still be considered legal in some states, the FTC and, more importantly, multiple federal courts have scrutinized the way they operate and ruled against the owners, the companies who offer them, and the wrongful ways in which they trick small business owners. It’s always important to remember that just because a MCA may technically be “legal,” that doesn’t mean the lenders aren’t engaging in predatory or illegal practices. In many cases, they are.

If MCAs are Legal, Why Are They Bad for Business?

A merchant cash advance claims to be an advance on future receivables. If done properly, it’s not technically a loan. And since it’s not a loan, it can’t be regulated in the same way as a loan. 

While MCAs may be deemed legal in some areas, the lack of regulation coupled with lenders’ greed has resulted in them becoming nothing more than horrible, high-interest, business payday loans. This is because they have a short repayment timeline with no cap on interest. Businesses sucked into them often end up paying well in excess of 300% APR. If you have taken one out, it’s a very real possibility that you are paying an interest rate far in excess of Texas’ 18% interest rate cap for businesses.

Bottom line? MCAs are debt traps, and we recommend they should be avoided at all costs. 

Are MCAs Regulated At All?

MCAs do currently face some regulation, but it isn’t much, and it isn’t as strict as it should be. 

One example of regulation is the Uniform Commercial Code (UCC), a set of laws governing all commercial transactions in the United States. A UCC could apply if there are any default issues with your MCA. If you paid it off and your lender doesn’t remove the lien, you have a legal right to get it removed. But there’s one problem: UCC isn’t actually federal law, it’s just adopted across the country — which means there are often local or state workarounds. 

Aside from UCC, some states are starting to enforce MCA regulations. Their policies are reigning in things like: 

• Lack of transparency in terms and pricing (CA & NY)
• Use of confessions of judgments (COJs)
• Prohibiting MCA lenders from filing COJs against debtors who don’t live in New York
• Recent rulings pointing to evidence that no true sale occured opening up RICO and usury claims

Going forward, increased MCA regulation is likely. However, unless it caps the overall effective rate of interest and the common threats of physical violence once a payment has been missed, they still won’t make an MCA a good option for any business. 

What to Watch Out For When It Comes to Business Lending

To avoid the detrimental effects of problematic MCAs, it’s important to know what to watch out for when it comes to business lending. Financing products like MCAs can seem like great solutions, especially if your business is in debt, looking for a way out, and needs instant cash. However, their contracts are extremely one sided, giving them the freedom to pursue you and the business, as well as contact your customers and family members if you default.

Here are our top recommendations on what to look out for when exploring business lending options: 

• Daily or weekly payments that, when added up, are oddly high or take a large percentage of your profit
• Requirements to provide the password to your bank account 
• Promises that if you take a short term loan or MCA, you’ll be given a “good” loan or line of credit
• Failure to countersign the contract between you and the lender
• Non-traditional lenders or new “digital finance” companies whose websites have no  individual names, founders, or people behind the company, short histories, and missing BBB rating or other reputation

When to Find MCA Help

If you were convinced to get a merchant cash advance and have found yourself unable to get out from under it, there is help. Ask for help as soon as possible if: 

• You can’t make your payments on time
• MCA lenders or their collectors are harassing you
• MCA lenders or their collectors won’t put reconciliation or modification terms and conditions in writing

If you’re struggling with a MCA lender, get in touch with an experienced MCA attorney. Schedule a confidential consultation with The Lane Law Firm today.