MCA Frequently Asked Questions - Legal Guide
MCAs are typically offered by private funders or specialized financing companies, not banks. These providers evaluate a business’s credit card or sales revenue to determine eligibility. Banks, on the other hand, generally stick to traditional loan models.
When cash flow problems arise or unexpected costs need to be paid, MCAs offer small businesses rapid access to cash. Since the approval process is quick, businesses can access the money they need, and since the repayment schedule is based on daily sales, the MCAs are convenient for businesses with strong revenue and weak credit.
While MCAs don’t require collateral or fixed monthly repayments, repayment is taken directly from a percentage of the business’s daily sales. This means during slower periods, repayment is feasible, but it can be more expensive than regular loans.
An MCA or Merchant Cash Advance is a kind of business financing where a business gets a lump sum of money in return for a fraction of future sales. It is not classified as a loan but a sale of future receivables. Usually, businesses obtain this for quick access to working capital to avoid the long delays of approval from a bank.
Unlike conventional loans, Merchant Cash Advances are not reconceptualized as loans, and this is one reason why banks do not provide Merchant Cash Advances. Unlike banks which are limited by stringent lending regulations, MCA funders operate within the far more flexible ‘purchase and sale’ agreements’ paradigm. This is why MCA providers are more flexible than traditional banks when it comes to the alternative finance market.
MCA brokers find funders for business proprietors, help assess several offers, and facilitate the completion of the fund disbursement and collection of the relevant administration documents. Still, business proprietors need to check a broker's reputation to ensure they won't have undisclosed charges or predatory conditions.
Yes, Merchant Cash Advances are legal throughout the entire United States. Since they are structured as commercial transactions and not as loans, they do not fall under the legal definitions of lending, or usury and are, therefore, not subject to any lending laws. That being said, each state has the right to impose further regulations regarding fairness and disclosure of contracts.
Since Merchant Cash Advances represent a sale of future receivables and not a loan with interest, they are legal. This distinction relieves them from most lending regulations associated with banks and lending institutions. MCAs are legal as long as contracts are clear and reasonable.
The Purchase and Sale Agreement outlines the terms of the MCA, including how much receivables are sold and how repayment will be completed. This safeguards the funder’s right to repayment, and similarly, ensures the business isn’t personally liable beyond the agreed sales. This clarity of documentation helps avoid any potential legal conflict in the future.
Since interest rates on loans are controlled under usury laws, many will assume that MCAs will fall under the same category, but they won’t. MCAs are legally defined as purchases of future revenue with no interest rate attached, and lack of a fixed repayment plan makes it impossible for usury laws to apply. This is the reason why they are regulated under different principles.
Disputes tend to arise from concerns over unfair agreements, overly aggressive debt collection, or misclassification of MCAs as loans. Some funders misuse ‘confession of judgment’ clauses to obtain judgments outside of court. These agreements can be legally challenged, assuring businesses of their rights.
A Confession of Judgment (COJ) clause enables a lender to get a court judgement —without a trial — if a borrower defaults. Though some MCA contracts include this clause, it has been restricted in many states. Given this, businesses should thoroughly review contracts and obtain legal counsel prior to signing.
Your pre-approved Agreed Judgments mean a settlement has been reached and accepted by both parties. they are included in MCA agreements to expedite the legal process in the event of a default. However, it may hold back the ability of a business to defend itself later on, so a professional review is required.
When a business struggles to meet payment obligations, the funder might consider daily withdrawals or default legal options to collect payments. Since payments are based on real sales, some contracts offer the option to reconcile payment due. Close, frequent contact with the funder helps stop things from escalating.
Neglecting to pay debts can result in accounts being frozen, legal action, and reputational damage to your business credit. In addition, some funders under personal guarantees will try to seize business assets. Getting legal counsel right away can help negotiate or resolve the debt before it escalates and causes further complications.
Under commercial law, businesses are entitled to disclosure of terms, options for reconciliation, and fair treatment. Some states have regulations requiring MCA funders to disclose and explain all costs and equivalent APRs. Reconciling all terms before finalizing a deal is a best practice from a company’s legal and financial perspective.
The daily percentage indicates how much of each day's sales are automatically sent to the funder for repayment. Since this varies with the business's revenue, it tends to be higher on busier days and lower on slower days. This feature of the system makes repayment flexible and aligned with the business's cash flow.
If actual sales fall below projected sales, a business can request an adjustment rec as a result of a reconciliation clause. This reduces the probability of over-collection. It also allows the repayment to be proportionate and equitable. In the absence of this clause, funders can demand high payments even when actual revenue is significantly decreased.
When a business takes out several MCAs simultaneously to pay off past debts, it is termed as “stacking.” Although it might give a business some short-term relief, it can result in very high daily payments, which can then lead to severe cash flow issues for the business. Stacking also increases the risk of business failure. In extreme cases, it might result in legal action. Therefore, it should be avoided.
For some businesses, MCAs offer a convenient option when they need quick access to capital without the hoops of a traditional bank loan. Still, the high cost of capital and the impact of repayments on a business' cash flow should not be underestimated. MCAs are best suited for short rather than long-term financing.
Although Merchant Cash Advances are useful financial tools, some unethical funders use dishonest practices. The main thing is to pick licensed, transparent providers who are up front with all fees. Always check about the company before signing.
Due to excessive fees, ruthless collections, and deceitful selling practices, many consider MCAs to be scams. The product itself, however, is legal. The conduct of a few funders creates this perception. The majority of issues is avoided when reputable firms are employed.
Beware of funders who say they have “guaranteed approval”; those who hide fees; or those who rush you into signing. Scam companies often have no or unverifiable business or contact information. Always check credentials and contracts carefully.
Issues such as unclear repayment agreements, absence of reconciliation clauses, and pledges of funding that don't line up with realities are unsatisfactory. It is preferable to decline if a company does not give you any documentation or is overly pushy. Legal analysis can identify concealed traps.
Scams involving MCAs can be reported to the state attorney general, the Federal Trade Commission, or the Consumer Financial Protection Bureau. Including copies of any documents or communication related to the scam will help the authorities conduct their investigations. Reporting these will also help safeguard other small business owners.
As an online resource center, MCA Exposed teaches business owners about scams regarding Merchant Cash Advances. It provides materials, tools, and guides that help businesses recognize predatory funders and defend themselves against financial exploitation.
Yes. MCA Exposed permits small business owners to tell their story and report fraudulent or deceptive MCA businesses. These accounts allow for the notification of others and form part of the growing database concerning scam activity in the MCA industry.
When you report a scam, you help other small business owners avoid the same pitfalls. It also helps scam authorities and legal advocates track down repeat offenders and hold predatory scammers accountable.
Following the submission of a complaint, the system evaluates the report and incorporates it into their awareness database. This public record has the potential to increase visibility, bringing it to the attention of MCA defense attorneys or regulators who help victims.
If you have fallen victim to a scam, MCA Exposed will connect you with attorneys and settlement professionals specializing in MCA defense. These professionals assess your situation, walk you through your entitlements, and advise you on potential remedies, whether through the court or a settlement.