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Are Merchant Cash Advances Legal?

Considering financing options for your small business? You might want to consider a Merchant Cash Advance. We’ve answered the most common questions below.

What is a merchant cash advance (MCA)?

An MCA is usually a loan to a small business with a number of possible financing options. The payment terms are often less than two years, which is shorter than loans from traditional banks, and the payments are smaller than they would be to traditional banks. The payments are typically paid daily, which keeps the payment much smaller than most types of loans. A common type of MCA is a loan to a small business in return for a percentage of subsequent credit card and debit card sales. When a credit or debit card sale is processed, the percentage is automatically deducted and sent to the merchant cash advance company. This continues until the full amount of the money transfer has been repaid.

Is an MCA a loan?

In a word, no. The cash advance to the small business is considered a sale of part of upcoming credit/debit card sales. Because MCAs are not considered loans, they are not restricted by the same state laws that traditional bank loans are. Therefore, MCA companies can charge higher interest rates than the more regulated industries of a traditional bank.

Advantages of a Merchant Cash Advance

A common reason for choosing to use an MCA instead of a traditional loan is related to the qualifications of a small business owner. If the owner has poor credit but has still demonstrated a positive cash flow for the business, they stand a much better chance of receiving an MCA as opposed to a traditional bank loan.

One of the most attractive advantages of an MCA is how fast it can be processed. A merchant can have access to the funds from an MCA much faster than from a traditional loan.

Another advantage of MCA is that the amount paid back to the MCA company is directly related to the volume of credit/debit card sales. This allows more money to be repaid on days where there are more sales and less money to be repaid on slow days.

Are Merchant Cash Advances legal?

The courts have decided that since MCAs are not loans, they are not restricted by the typical usury laws and banking laws like other conventional loans. Therefore, merchant cash advances are completely legal.