Payday Loans

The US Laws For Merchant Cash Advance

Sometimes, small businesses find it very difficult to obtain a conventional business loan to meet their financial requirements. Merchant cash advance programs have emerged as an easy solution in such situations. These are commercial payday loan programs that are available for merchants and small businesses. The basic concept is similar to consumer payday cash advances. However, the US laws that regulate these types of programs vary. Following is a brief rundown on what the laws in the United States of America says about these loans.

How Does It Work?

There are some specific eligibility criteria that a business must meet in order to qualify for merchant cash advance programs. In general, these types of loans are available to those small businesses that accept credit card payments. Lenders determine the amount of loan that can be issued to a business on the basis of the estimated volume of credit card sales that it is expected to process in the next few months. The sales volume also determines how the repayment terms should be designed. There is no legal limit on the minimum repayment period or maximum loan amount that can be issued to a merchant.

Sale Or Loan?

It is very important for you to keep in mind that merchant cash advance programs are usually considered as sales, not loans, probably because there are no minimum payback requirements. Generally, the borrower has to pay back a certain percentage of the total monthly credit card payments to the lender until the contract is fulfilled. For example, if a small business borrows $100000 and the interest rate charged on this amount is $30000, the lender will keep collecting money at a fixed percentage of the sales volume of the business every month until they collect a total of $130000.

However, some merchant cash advance providers treat these programs as loans. In such cases, the loan contract sets a due date; the borrowed money must be paid back within the set time limit. If you fail to repay in time, you will be charged hefty penalty charges. Besides that, you will also have to pay additional interest for every single day of delay. Overall, it entirely depends on how the cash advance providers treat these programs that determine whether these programs should be considered as sales or loans.

Rules And Regulations

Even the laws that regulate merchant cash advance vary depending on whether the providers are treating these programs as loans or sales. The usury laws apply in cases where these types of cash advances are treated as loans. As per these laws, the interest charged on these loans must not be higher than the maximum rate allowed by the state where the business (borrower) is located. It is important to note that different states have different laws in this regard. Where some states have imposed low rate cap and do not allow lenders to charge more than 20% or 30% on any type of loan, there are other states that put cash advance programs in a special category and allow lenders to charge extremely high rate of interest, which can go as high as 300% per annum or even more.

However, in cases, where merchant cash advance programs are treated as sales, the providers do not have to comply with the usury laws of the state. Generally, providers charge up to 25% on the amount of money issued to the business as part of the program. However, there is no legal maximum limit on how much they can charge. Some providers charge higher rates also. When these programs are structured as sales, the lending regulations do not apply to them.

What If The Business Goes Bankrupt?

Merchant cash advance programs are treated differently even in cases of bankruptcy. If it is being treated as a loan, the court may consider it as a dischargeable debt. But, if it is being treated as a sale, the debt will not be discharged; even if the business has already filed for bankruptcy, the cash advance provider will still have the right to pursue collections. However, the Fair Debt Collection Practices Act may still apply.

Overall, if you are considering borrowing a merchant cash advance, you are advised to keep the above rules and regulations in mind. The more informed you are, the better decision you will be able to make in the best interest of your business.


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