MCA FAQs

A Merchant Cash Advance is a form of financing where the Merchant sells either a percentage of their revenue stream, or an amount of future revenue or receivables, (which is called the “Purchased Amount”) to a lending entity, at a discount, in exchange for cash (which is called the Purchase Price”). The Purchased Amount is collected via ACH from the Merchant’s bank account on a daily or weekly schedule. 

In New York, the criminal usury rate is 25%. Any loan that charges more than 25% per year is illegal. There will always be a debate regarding the legality of Merchant Cash Advances because when annualized, most Merchant Cash Advance lenders will receive much more than 25% on their initial advance.

Yes, the Merchant-Business owner is required to personally guarantee the performance of the Merchant Business. In the event of a default, the lender can enforce its rights against both the Business and the Individual.

Lenders will argue, and some courts have held, that Merchant Cash Advances are not loans because they are not absolutely repayable like a true loan; the lender is at risk of losing the entire investment if the Merchant-Business shuts down, fails, or files for bankruptcy. The Merchant Cash Advance agreement must contain a ‘Reconciliation Provision,’ granting the Merchant-Business the right to lower payments to reflect a slowdown in business. The Merchant Cash Advance must also have an indefinite term.

A Merchant Cash Advance is typically used when funding is needed quickly, when the Merchant-Business cannot stand to wait for a traditional lender to go through all its due diligence.

The law recognizes that a Merchant-Business may legally sell invoices, receivables, and revenue to a lending entity at a discount and it is not considered to be a loan.

Because the Merchant Cash Advance is not considered to be a loan, and there is no interest, theoretically, there can be no usury.

A Merchant Cash Advance is assumed to be legal when the lender abides by the terms of the contract. The Merchant Cash Advance Agreement may be deemed an illegal loan if the lender violates the Agreement or if it treats the transaction like a loan.

Usury can apply when the lender treats the transaction like a loan, fails to grant the right to lower payments to the Merchant-Business, or fixes the terms of the Agreement.

New York Law holds that a usurious loan is any interest over 16%. A Criminally Usurious loan is anything over 25%.

New York Penal Law § 190.40

If a lender charges more than 25% annually, the loan is invalid, illegal, and void as a matter of law.

In New York, a person is guilty of Criminal Usury in the Second Degree when, not being authorized or permitted by law to do so, he or she knowingly charges, takes or receives any money or other property as interest on the loan or forbearance of any money or other property at a rate exceeding twenty-five per centum per annum or the equivalent rate for a longer or shorter period.

Typically, banks do not offer Merchant Cash Advances.

Any kind of person or entity may issue a Merchant Cash Advance which is why these transactions can be dangerous for the Merchant-Business if the Merchant Cash Advance lender cannot be vetted or verified.

A loan is to be repaid no matter the circumstance. A Merchant Cash Advance is meant to be contingent on whether the Merchant-Business generates revenue.

The Purchased Amount is the total amount to be repaid to the lender by the Merchant-Business.

The Purchase Price is the amount to be advanced to the Merchant-Business by the lender.

The ‘Factor Rate’ is the Purchased Amount divided by the Purchase Price. The ‘riskier’ the lender deems the Merchant-Business, the higher the Factor Rate will be.

In New York, the criminal usury rate is 25%. Any loan that The ‘Specified Percentage’ can mean two things. It can either be the amount of the revenue stream that is being sold to the lender, or, if the lender purchased a specific amount of revenue, it is the percentage of revenue to be collected by the lender on the daily or weekly basis.more than 25% per year is illegal. There will always be a debate regarding the legality of Merchant Cash Advances because when annualized, most Merchant Cash Advance lenders will receive much more than 25% on their initial advance.

The daily or weekly payment, sometimes referred to as the “Remittance” by lenders, is the amount that is ACH debited by the lender from the Merchant-Business’ bank account.

The daily or weekly payment is meant to reflect the Specified Percentage of the Merchant-Business’ daily or weekly revenue (Specified Percentage X Daily/Weekly Revenue = Daily/Weekly Payment).

An origination fee is charged to the Merchant-Business and usually deducted from the amount delivered to the Merchant-Business. Sometimes the amount is paid to a third-party broker as a commission for bringing the Merchant-Business to the lender. Sometimes, the Origination Fee is merely withheld by the lender to increase the return on investment.

A broker, just like in any other industry, connects the lender to the borrower. The broker is typically paid from the Origination Fee that is deducted from the Purchase Price (funding amount). A broker does not need a license.

An ACH fee is charged to the Merchant-Business and usually deducted from the amount delivered to the Merchant-Business. Many times the Agreement will state that the ACH is not an automatic process and that it is ‘labor intensive’ despite ACH standing for “Automatic Clearing House.” 

A reconciliation provision, or a ‘true up,’ is a clause in the Agreement that obligates the lender to return money that may have been over-collected if there was a downturn in business. 

An ‘Adjustment,’ which can also sometimes be referred also as a ‘Reconciliation’ , obligates the lender to lower the daily or weekly payment to reflect a downturn in business.

‘Stacking’ is a term coined by the Merchant Cash Advance lender when the Merchant-Business enters into multiple cash advances. However, because Merchant Cash Advances are so expensive, Merchant-Businesses usually are forced to take additional Merchant Cash Advances on in order to keep making the steep payments. The lender will usually charge a monetary penalty to the Merchant-Business if it defaults due to ‘Stacking.’

It can be an ‘Event of Default’ if (1) the Merchant-Business blocks the lender from ACH debiting from their bank account (2) there are more than a certain number of rejected ACH debits due to insufficient funds in the account within a certain amount of time, (3) change your bank account without giving notice to the lender, (4) closing your bank account without notice to the lender, (5) opening or using a business account without notice to the lender, and more.

The best kind of Merchant Cash Advance is NO CASH ADVANCE. However, if you have one, or need one, the best would be one with a low factor rate, low fees, low daily/weekly payments, a robust reconciliation provision, and a very communicative lender that works with you, not against you.

If a Merchant-Business cannot repay the Merchant Cash Advance because of lack of receivables, for example if the Business shuts down, closes down, or files for Chapter 7 bankruptcy, the Merchant Cash Advance is no longer owed.

The lender can file and/or begin to enforce its UCC lien against the Merchant-Business’ assets, including its clients and customers–without having to go to court. The lender can also file a lawsuit in State or Federal Court for breach of contract and personal guarantee. These options can be done simultaneously.

You may receive word from your customers and clients that they received letters from the Merchant Cash Advance lender directing them to forward payment to them instead of you. You may receive a copy of a Summons and Complaint in the mail. You may not receive a copy of the Summons and Complaint, but instead be notified that your bank account is frozen.

Twenty years.

Having worked in this industry for almost a decade, and seeing the destruction these Merchant Cash Advances can cause to American businesses, no, they are not worth it.

A Merchant Cash Advance is expensive, it comes with exorbitant fees, the term is short, the daily or weekly payments are enormous, and can lead to the downfall of the Merchant-Business, in and of itself.

A Merchant Cash Advance can be a scam. There are also several scams within the Merchant Cash Advance industry.

• The lender can refuse to lower payments or refuse to reconcile the Merchant-Business’ account.
• The ‘Carrot’ is a scam where a Merchant Cash Advance lender promises a second larger cash advance if the outstanding advance is paid in full early. It can also be the promise of a larger traditional loan that never materializes, used to incentivize the Merchant-Business to continue to make payments, even if the Business does not have the revenue to sustain the payments.
• The lender can double, triple, or even quadruple debit from the Merchant-Business’ bank account.
• The lender can collect more than the Purchased Amount.
• The lender can continue to charge a monthly fee after the Purchased Amount is paid in full.
• The lender can freeze assets outside the jurisdiction of the Courts.

On August 1, 2023, the New York Department of Financial Services finalized a regulation to enforce the New York Commercial Financing Disclosure Law. This law applies to non-bank commercial lenders offering small business loans up to $2.5 million. Under the Act, certain providers of “specific offers of commercial financing” must present Truth in Lending-like written disclosures to recipients at the time the offer is made.

California, Utah, and Virginia have similar laws.

The State of California passed SB 1235, which, similar to New York’s regulations, mandates that certain commercial financiers and Merchant Cash Advance funders provide specific disclosures to merchants and MCA recipients.

Utah enacted regulation governing Merchant Cash Advances. UTAH now requires that Merchant Cash Advance lenders and brokers register as Merchant Cash Advance Providers. They must register with the UTAH Department of Financial Institutions. 

Legislation targeting Merchant Cash Advances offered to Virginia businesses must comply with VA House Bill 1027, which took effect on July 1, 2022. The law requires MCA funders and brokers to: (1) register with the Virginia State Corporation Commission, (2) provide specific pre-funding disclosures to MCA recipients, and (3) prohibits and disqualifies the use of Confessions of Judgment.

Amazon, Intuit, Shopify, Stripe, Square, and PayPal Working Capital are the largest companies. They are followed by OnDeck Capital, Rapid Finance, and Kapitus. The smaller companies include National Funding, Credibly, Fundbox, and Fox Funding.

If a Merchant-Business is struggling to make payments, the Merchant-Business should request a Reconciliation and an Adjustment. If the Merchant-Business fails, due to lack of revenue, it should be communicated, with proof, if possible.

If the Business fails or if receivables are no longer being generated the Merchant Cash Advance should no longer be owed. There may be grounds to not pay the Merchant Cash Advance if the lender has breached the Agreement, committed fraud, or otherwise done some kind of wrongdoing.

You can settle your Merchant Cash Advance debt. However, without competent legal counsel, the lender will push for terms most favorable to them and you will most likely not know what to ask for in the settlement agreement. This is where legal counsel is most important. Not only can legal counsel attempt to reduce the total amount owed, but competent legal counsel will make sure that YOUR needs come first.

Most lenders, upon settlement, will require the Merchant-Businesses to agree to permit the lender to enter judgment if the Merchant-Business violates the settlement agreement. The only prerequisite to entering a consent judgment, is that a lawsuit is filed before the settlement agreement is signed. The lender will not give any notice that the settlement agreement was breached or that the consent judgment was filed.

Forum shopping occurs when the Merchant Cash Advance lender selects a court in a specific place with more favorable laws or processes, despite lacking any legal connection to that place. 

If the lender requests copies of AR reports or invoices, then you must deliver copies. Typically, without the request from the lender, the Merchant-Business does not have to keep providing receivables to the lender.

You need to hire a competent attorney in the State where the lawsuit is filed. If the lawsuit is filed in New York, you should call my firm.

If you don’t respond to a Merchant Cash Advance lawsuit, a default judgment may be entered against your Merchant-Business, and the personal guarantor.