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Is Merchant Cash Advance Legal? The Truth Every Business Owner Should Know

For small businesses desperate for quick cash, merchant cash advances (MCAs) are often seen as a last resort rather than a lifeline. However, their legality and lack of regulation usually raise questions. In this blog, we’ll explore whether MCAs are legal, the regulations governing them, and what businesses need to consider before opting for this form of financing.

Are Merchant Cash Advances Legal?

Merchant cash advances are legal in the United States. However, they exist in a grey area, as they are not considered traditional loans. Here’s how their legality is defined:
  1. MCAs Are Commercial Transactions: MCAs are structured as purchases of future receivables rather than loans. This means they are not bound by state usury laws that cap interest rates.
  2. Lack of Federal Oversight: There are no federal regulations specifically governing MCAs. This allows providers to operate without adhering to traditional lending laws.
  3. State-Level Regulations: Certain states, like New York and California, have implemented measures to regulate MCA practices, such as requiring disclosure of terms and prohibiting predatory practices.
  4. What Legal Protections Exist for MCA Borrowers?: Despite their legality, MCAs often lack robust borrower protections. Here are some legal frameworks that may apply:
  5. Usury Laws: While usury laws cap interest rates on loans, they typically don’t apply to MCAs since they are classified as commercial transactions. However, some courts have challenged this classification.
  6. Truth in Lending Act (TILA): MCAs generally fall outside the scope of TILA, which mandates disclosure of credit terms. Some states have adopted similar requirements to ensure transparency.
  7. State-Specific Consumer Protection Laws: Certain states, such as Illinois and Colorado, have enacted laws to protect small businesses from abusive MCA practices by requiring clear terms and fair collection practices.

How Courts Are Addressing MCA Disputes

In the absence of federal regulations, courts have increasingly been called upon to resolve disputes concerning merchant cash advances. New York courts often evaluate whether MCAs are legitimate sales of receivables or disguised loans, considering factors such as reconciliation provisions, finite terms, and lender recourse. The Federal Trade Commission (FTC) and state attorneys general have also targeted MCA providers for deceptive practices, including misleading terms and predatory collection methods. Additionally, class-action lawsuits in states like California and New Jersey have led to settlements mandating reforms in MCA practices, such as improving reconciliation terms and limiting personal guarantees.

Should You Consider an MCA for Your Business?

While MCAs offer fast funding, they come with significant risks. To learn more about their advantages and disadvantages, check out our detailed blog on the pros and cons of MCAs. Here are some alternatives to consider:
  • Small Business Loans: Lower interest rates and longer repayment terms.
  • Revenue-Based Financing: Flexible repayment tied to monthly revenue.
  • Business Lines of Credit: Access funds as needed, with lower costs.

Conclusion

Merchant cash advances are legal but largely unregulated, leaving borrowers vulnerable to high costs and predatory practices. If you’re considering an MCA, ensure you understand the terms and explore alternative financing options. For businesses already struggling with MCA debt, seeking expert advice from professionals like Business Debt Adjusters can help you regain financial stability.