Home Finance Are Merchant Cash Advances Regulated: Everything You Need To Know

Are Merchant Cash Advances Regulated: Everything You Need To Know


Years of popularity have made MCAs one of the favorite alternative sources of commercial funding for the micro-business owner when the time comes to seek additional finances.

But gone are the days when rushing for a merchant cash deal meant getting affordable financing. Some lenders have shifted focus to the money-making aspect of the business, forgetting to consider the microbusinesses they previously intended to assist. In other words, your MCA deal could be a minefield and not a gold mine as you would love it to be.

What’s an MCA Anyway?

A merchant cash advance, in the simplest terms, is a form of funding where a financer gives a lump sum of cash (up front) to a business-owning merchant in exchange for a portion of his/her businesses anticipated credit and debit card sales.

Repayment takes place in the form of daily deductions off a merchants card sales. The lender remits a previously agreed-on percentage from your day’s sales.

Instead of APRs, MCAs have a factor rate ranging from 1.2 to 1.5. To get the amount repayable, work out (Factor rate x Lump sum amount). Depending on your source, a cash advance may also come with other related costs- which you must ask your lender to specify.

It also helps to learn that the better your credit score, the lower your APR because the lender sees you as capable of settling the debt, and vise versa ( a high factor rate means you pay more for the funding). Also, because you must pay daily, the longer you take paying, the more you pay in fees.

3 Things That Could Make Your Merchant Cash Advance Expensive

As we said earlier, there are several reasons to approach MCAs with caution. You don’t want to dive into a deal when industry watchdogs are pushing for merchant cash advance regulation.

  • Exorbitantly high APRs. Though they come with factor rates, converting this digit to an APR can give you a clearer picture of what your cash advance costs. If possible, use an online merchant cash advance calculator to do your math right.
  • Large per-day payments. Though you should repay based on how you earn, if your credit card sales go on as predicted or even go up, you could end up paying more per day in settlements. High per day payments can ruin your cash flow because APR depends on how quick you repay the MCA.
  • Risks of a Cycle of debt. Taking more and more of this expensive form of funding could lead to cash-flow problems putting you at the risk of defaulting debts.

MCA Regulation: Why The Industry is Unregulated and How to Stay Safe

Because of its nature, as a sale and not a loan, MCA firms have managed to dodge federal regulations controlling loans.

Only a few state laws tried to pass usury laws inhibiting merchants from charging exorbitant interest rates until a 2016 ruling by a New York State Judge concluded otherwise. The ruling stated that “as long as an MCA is not a loan, all companies offering the product are not subject to usury laws.

In other words, the fact that MCA providers aren’t classified as lenders means they are operating in a highly unregulated sector where every player can set rates as they wish.

However, of late different agencies like the Federal Trade Commission have been speaking up for small businesses and working to pass drafted laws intended to regulate the Industry. For now, merchants can take the following steps to stay safe when seeking MCAs.

  • Scrutinize the cash advance provider.
  • Convert the pricing model from the Factor rate to APR.
  • Seek the advice of a trusted financial consultant.

Wrapping Up

Now that you know every potential danger of using this new method of getting commercial financing to take care not to be caught unaware. It is best to walk into a deal only after digging deep into its details.

Author Bio: As the FAM account executive, Michael Hollis has funded millions by using merchant cash advance ISO solutions. His experience and extensive knowledge of the industry has made him finance expert at First American Merchant.