are merchant cash advances illegal


Merchant cash advances have gained a lot of attention from small business owners, lately. These products have also been examined and criticized by several sources in the lending industry. The concern that these sources claim to be the problem is that the merchant cash advances aren’t subjected to the same lending guidelines as they are required to follow. Since the new competition has recently entered the marketplace and started gaining popularity, the scrutiny has increased significantly. Many companies have brought the issue to the attention of the courts and banking regulators. The products are continuing to grow in popularity as an alternative funding source that’s highly accessible to small businesses. This article will address the concerns that have been raised and explain the inner workings of merchant cash advances.

Merchant cash advances are a relatively new concept. They’re similar to invoice factoring in the respect that they are approved based on a company’s receivables history. While invoice factoring uses invoices billed as the source of lending, merchant cash advances use future credit account receivables as a source. The company is required to show a history of credit card receivables that demonstrates a reliable history. From this point, the loan amount is determined and funded.

Many small business owners turn to this as a source for quick cash they need immediately. With traditional loans and lines of credit, companies must have an established credit history. The issue this poses to many businesses is that they’re unable to establish a credit history that would be considered to be adequate. This is especially true for businesses that have only been around for a few years. Since the owners cannot provide the adequate history, they’re often forced to use their own money or collateral to qualify for financing. Many business owners are sole proprietors and would prefer to not risk their homes or other assets to qualify for a loan. Additionally, bank and finance company loans take a significant amount of underwriting time and can be denied even at a much later date. This causes business owners to have to turn to other sources to finance their costs. As unexpected expenses can be an immediate need, they have no other choice. Merchant cash advances also offer them the option to defer some of the payment to a future date. They’re still required to pay a small amount that’s deducted daily from their credit sales. This is a huge benefit to seasonal businesses and those who occasionally are short on cash flow.

Despite the efforts of banks and finance companies, the merchant cash advance option is still very present and legal. These companies may have to seek ways to make options that are more advantageous to the small business community. Another factor is that these companies are also highly competitive among each other. Having yet another competitor is unfavorable and undesirable. Many companies have implied that merchant cash advances even border on predatory lending.

While merchant cash advances do provide a wealth of benefits to small business owners, they’re far from free. The fees and interest rates are typically much higher than what is charged by any bank. However, many small business owners continue to see the benefit as worthwhile. Being able to get money in an emergency is critical to the survival of any small business. Without quick funding options, many of these businesses may be forced to close. This would cause an even bigger problem for not only the business owners themselves but also for the banks and investors that they may have borrowed from to open. Underfunding continues to be a major source of many small business closures.

With merchant cash advance competition increasing, it will be interesting to see if the companies start becoming more competitive among each other. Since they’re considered to be convenience products, chances are that the costs and interest would still be higher than a traditional lender. However, new products will continue to enter the finance world as they always have. There may be other products that are introduced which will prove to be even more beneficial to small business. This could perhaps make the pricing for these products even more affordable. Regardless of the scenario, it’s worth keeping up with the merchant cash advance business to see the ultimate outcome as a result of the recent events.


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