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are merchant cash advances illegal

October 20th, 2018 by Max Soni

Merchant cash advances are a financial product that’s providing many small business owners with the funds they need to continue growing. The service has been placed in the media spotlight recently due to opposition by traditional lenders. These companies have challenged the services claiming that they should be illegal. This article will review merchant cash advances and the benefits they provide. It’ll also answer the question of whether or not they should be legally permissible.

Merchant cash advances work similarly to a business line of credit. The major difference is that they’re lent based on an anticipated sales and receivables forecast. A business line of credit is lent solely based on a business’s credit record and profitability record. Of course, these things can vary from lender to lender for each of these products. Typically a bank product undergoes a significant amount of processing and underwriting. It can take months before even an approval decision is made. They can even be denied should updated records not support the business’s initial claims. Unlike bank loans, merchant cash advances aren’t’ based on the business’s credit history. They’re concerned with the sales track record and how the business is performing form a revenue standpoint.

Merchant cash advances draw in small business owners due to the fact that many new businesses simply don’t have enough established credit to qualify for a bank loan. Also, these businesses tend to need much faster approvals and funding times. Since the business owner can typically produce the information that the advance company requires, they’ll receive the money when it’s needed. This can be a blessing for many small businesses that may need the loan to make repairs or to cover slow cash flow periods. A single emergency can paralyze a small business to the point where it can no longer stay open. It’s common knowledge that many small businesses close simply due to being underfunded.

Another major draw to merchant cash advances is that they can defer payments for a significant amount of time. This is refreshing for seasonal and highly cyclical functioning small businesses. The business owner makes small daily payments that are deducted from their credit sales. The process is very similar to invoice factoring which uses invoiced sales as a method of lending. Businesses also only pay the fees and interest on what’s actually borrowed. This is another benefit over a business line of credit. These loans require that all of the interest is paid on the loan regardless of how much is actually used.

The major criticism that that merchant credit advance companies face is that they’re unregulated. As a result, it’s been implied that they could participate in predatory lending practices. The loophole is that since the advances aren’t lending based on credit or collateral, they’re technically not loans. They are clearly legal as businesses are using them at a significantly increased rate. Also, the small business owners are well aware as to what they’re agreeing to with the contracts they enter. Merchant cash advance companies freely admit that this is a convenience product and as a result, they charge significant interest and fees. Many small business owners still consider the service valuable enough to continue using the services. Whether or not the advances should be considered as loans should be at the discretion of the banking regulators. Should the banks wish to squash the competition, they should make their services more obtainable by the average small business.

Merchant cash advance companies also have increased in number. The reason this would be probable is due to the lack of strict regulations. Also, many banks provide similar services that haven’t been subjected to such scrutiny. Many modern-day accounts offer an optional overdraft option. This allows individuals and business owners to intentionally use more than their available account balance. The result is a significant amount of overdraft charges. Since the products are not actually loans but rather an overdraft, the banks are able to collect a significant profit from offering such services to the public. Perhaps the banks should offer a service that is similar in nature to the merchant cash advances. Until banks are able to provide more options, merchant cash accounts continue to benefit the small businesses and their owners.

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