Top 4 Legal Concerns for Merchant Cash Advance Businesses

19 May

The number of companies that have entered into the merchant cash advance (“MCA”) business has grown rapidly over the past year. An industry that seemed all but dead in 2008 has re-emerged and may be stronger than ever. With traditional lending institutions still cautious about lending, especially to startups and emerging businesses, MCA businesses have helped to fill the void in providing much needed capital to businesses shut out from the traditional lending institutions. Further, with independent sales organizations’ (“ISOs”) close relationship with merchants, ISOs are able to provide a value-added service while securing an additional source of revenue.

But ISOs should proceed with caution. There are many legal issues and uncertainties involved in offering cash advances. Set forth below are 4 legal concerns that an MCA business must be aware of when entering into an MCA arrangement with a merchant.

1.      Structuring Transaction as a Sale Rather Than a Loan

The most important legal concern for MCA businesses is structuring the transaction as a sale rather than a loan.

By structuring the transaction as a sale, rather than as a loan, the MCA business can avoid having to apply for the commercial lending licenses. In addition, the state usury laws may be inapplicable. Therefore, it is imperative that businesses thinking of offering cash advances to seek advice from a knowledgeable attorney.

2.      Tread Lightly in California

A majority of the litigation concerning cash advances has come out of California. The most prominent is Richard B. Clark, et al. v. AdvanceMe, Inc. under which AdvanceMe agreed to a settlement payment of $23.4 million and forfeited the right to pursue further payments from the plaintiff merchants. The litigation in California should make MCA businesses especially cautious when conducting business in California. .

3.      Drawing the Line on the Length of the Merchant Contract

With the increased interest in the MCA industry and the entry of new participants, businesses offering MCA services have to find ways to differentiate themselves from the competition. Obviously, pricing is a major form of differentiation. Another not so obvious form of differentiation is the sheer length and complexity of the merchant contract. A merchant may well choose a deal with a 4 page contract over one with 16 pages. Be mindful about finding the right balance between being legally protected and not scaring off business with a lengthy document.   

4.      Avoid Enforcement Action

States can impose harsh penalties on businesses that offer commercial loans without lender licenses or that charge usurious interest rates. However, there are few cases that address the issue of what constitutes a sale as opposed to a loan in the MCA context. Therefore, it is important that your MCA business adheres to the best practices discussed above so that if a court decides a case that is harmful to the MCA industry as a whole, you will avoid the attention of state attorney generals.

— Andrew Hayner, Jaffe, Raitt, Heuer & Weiss, P.C.

Holli Targan

Attorney & Partner

htargan@jaffelaw.com

Leave a Comment Below

Leave a Reply

Why ask?