Is there any legal regulation of MCAs? The answer is, not really. Since MCA companies “purchase” your future credit card sales in exchange for upfront funds, it’s considered a sale, not a loan. MCA companies don’t need to follow state usury laws, regulations governing the amount of interest that can be charged on a loan. They are almost entirely unregulated because they are not supposed to be loans. They are not subject to usury laws or banking laws like the Truth in Lending Act.
Business restrictions
To make sure they get paid, lenders have restrictive stipulations for your business. For example, you may be prohibited from making any changes to your credit card processor until after the advance has been repaid.
Occasionally, businesses may encourage customers to pay cash in order to avoid credit card fees or giving a percentage to the MCA providers. Encouraging cash payments, by offering discounts for example, payday loans in Kentucky could be restricted by merchant cash advance lenders.
Before you jump online and apply, it’s important to be aware of the pros and cons. Here’s a list to review.
Advantages
No need to prepare a business plan or gather a pile of documents. Most MCA providers initially require only the business owner’s social security number, a business tax ID, and general business information. Once you move forward in the application process, you might need to produce 2+ months of credit card processing data, 2+ months of business bank statements, and evidence of 2+ years accepting credit cards.
Unlike bank loans, it’s easy to qualify even if you have low credit scores. The application for a merchant cash advance means that you won’t need to supply as much documentation to potential lenders. Plan on gathering 4–6 months of bank statements, as well as other basic financial documentation. Depending on the lender, you may also need to submit your tax returns, accounts receivable report, and profit and loss statements.
An MCA is one of the fastest kinds of business financing available. Average turnaround for most business-owners is just a few days. Because the decision is weighted on revenue and sales records, paperwork is limited, accelerating decision-making process.
Disadvantages
APRs can be in the in the triple digits. It’s one of the most expensive options for small business owners in need of capital.
The funds from an MCA can get you over the hump but the high costs can quash any plans you have for growth. You may even need to take out and MCA over and over to keep from defaulting.
SmartBiz® customer Terry Trumbull, owner of Terry Trumbull Meats, had self-financed his business for years but looked to alternative sources for funds. He ended up taking out a short term loan that required daily payments 25 days a month. “That really hurt my cash flow and it wasn’t helpful in reaching my overall financial goals” he said.
While there is little paperwork, MCA contracts can be complicated because repayment is often structured in terms of both a stated percentage of the business’ future receivables over a stated period and an agreed fixed repayment amount over the same period. This is provided the merchant has the right to reduced payments once it documents the stated percentage of receivables was less than the fixed payments for the same period.
Matt McClean, another customer and owner of Wicked Chicken restaurant, came to SmartBiz for a better solution to daily payments. “Before I found SmartBiz, I took out what I call a ‘mafia loan’. It cost a ridiculous amount of money and required daily payments…so I started looking for a loan with a better rate.”