North American Bancard Blog

Merchant Cash Advance regulation: Is it real? [2019]

Posted by Joshua Griffin on

First of all, what is a Merchant Cash Advance? For starters, it isn’t technically a loan. Rather, it works much like a credit card advance, except it’s commonly extended to small businesses . A Merchant Cash Advance company basically extends, or “lends” you a lump sum of cash in return for a share of your future credit and debit card sales and profits. A Merchant Cash Advance isn’t a loan because the company is essentially buying your future credit card sales. How does that work? Normally, as the business owner, you’ll agree on a fixed amount with the Merchant Cash Advance company and they’ll deduct that amount from your credit and debit card sales when the time comes – either daily or weekly. The company will continue to receive a share of your sales until the advance is paid off.

small business owner reviewing MCA on computer.If you own a bar and happen to be in need of a $10,000 injection of capital for say, re-modeling, then a Merchant Cash Advance might sound alluring because you don’t need to wait around for approval from a bank or lender, there’s little hassle involved, and online applications with same-day approvals make it convenient to get the cash you need upfront. However, before you start applying for an MCA, be sure to do some research so that you know what type of rates to expect, what Merchant Cash Advance regulations exist, and so forth. 

Merchant Cash Advance industry report.

Let’s dive right into the heart of the matter: What is the current state of MCAs and what kind of rates can a small business owner expect? Normally, whatever company you go to will give you a quote, but unlike an interest rate, a factor rate is in decimal form. The factor rate for your merchant cash advance will vary from 1.2 to 1.5, so when you know your rate, be sure to multiply it by a total of the lump sum you’re receiving. Then you’ll know how much you need to pay the company back for your advance.

How does a Merchant Cash Advance company arrive at the figure they quote you? That all depends on how much they assess giving your business an advance is a risk to their company. If the Merchant Cash Advance company evaluates your business is successful enough to drive the sales necessary to pay back the advance, then you’ll be looking at a lower factor rate than the example factor rate. If your business isn’t projected to do too well with sales in the foreseeable future, that, coupled with a low credit score, and inconsistent credit card sales, could mean you’ll be looking at a figure on the higher end of the factor rate spectrum. 

The Merchant Cash Advance company just wants to make sure they get most of their money back should you default on future payments. It’s no different than applying to buy a house. Based on your income and credit score, you might get a better mortgage if all things seem favorable to the bank. Likewise, whether you’re high risk or low risk in your business sales will determine how high your rate is.

Merchant Cash Advance agreements.

When you receive a quote and calculate it, it might not seem too bad, but if you convert your factor rate to APR, then you’ll be looking at a much higher cost to repay. Always make sure to check what your effective APR will be before you agree to a Merchant Cash Advance option. Once you agree and accept the amount, you’re “all in” and liable for all payments that come with that agreement.

business owner talking on the phone and reviewing MCA agreement.

While the overall expense you might end up paying could outweigh the convenience and quickness of an MCA, one benefit you’ll be looking at is that you won’t really be stuck with huge payments. The provider will only take a fixed percentage from your daily credit card sales, so if your business is going through a slow month of debit and credit card sales, the Merchant Cash Advance company will naturally be taking less from your total credit card revenue. Likewise, if you flip the coin and you have a busy month of credit card sales, the company takes a bigger percentage and that could hurt your bottom line since your APR hinges on how quickly you repay the advance.

Is Merchant Credit Card Advance regulation real?

The simple answer is no, and here’s why. Merchant Cash Advance companies purchase your future credit card sales, remember? It’s not a loan, it’s a sale and therefore, Merchant Cash Advance companies don’t have to adhere to federal regulatory oversight that lenders must adhere to. State usury laws assure lenders cannot charge high-interest rates, but again, since merchant credit card advances are not loans, the companies are bound by no such laws. It’s a technicality that allows them to go unregulated, but could we be moving towards regulation?

As MCAs become more common, non-bank and online lenders will be put under the magnifying glass. Since a Merchant Cash Advance is still a purchase of receivables and not a loan, it cannot be regulated by state usury laws, but self-regulation is more probable in order to avoid future state regulations as Merchant Cash Advance companies are further scrutinized. Eventually, there will have to be some sort of government regulation to supervise online lending and while it might not necessarily end up being MCA regulation, it could be more like regulation of online small business lenders. That might not affect merchant cash advance companies, but regulation of industry-wide rate disclosures and rate limitations are within possibility for the industry. 

Merchant Cash Advance industry statistics.

All in all, Merchant Cash Advances come with pros and cons and as you would any other business venture, you must do your research. Their most appealing quality is fast funding. You just have to decide if they’re right for you. If you need quick money, a bank loan might not be a realistic solution. Fewer than one in five small business owners who apply for a loan are actually approved for one. If a bank turns you down for a loan, you’ll still need the money to possibly even stay in business, so then what do you do?

A Merchant Cash Advance may be your best option. Of course that doesn’t mean to proceed without caution. If you properly vet the Merchant Cash Advance company, convert the pricing structure to APR and consult a trusted and experienced financial advisor, an MCA is still a viable option for select small business owners strapped for cash.

Shopping your options is essential, and with North American Bancard, you can get up to $250,000 and approvals within hours. NAB also offers fixed payment amounts based on deposits, including cash, which makes it stand out from other Merchant Cash Advance companies that only take a fixed amount of credit card sales. It gives you both options which might make more sense to your specific business if you happen to make more cash sales some months.

CONCLUSION

Merchant Cash Advances certainly aren’t for everyone, so be sure to think before you make the leap. If you are in need of a merchant cash advance, the team here at North American Bancard is here to help. The application is quick and easy with same-day approvals and funding in as little as 48 hours. 

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