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Amazing New Social App Allows You To Connect With Millions Of Prospects… Instantly!

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By Michael Frank Hoffmann

A new software application will enable sales professionals to connect with prospective customers without having to form disingenuous relationships on social media platforms in a hopeless attempt to generate business by sending poorly crafted DMs or liking photos of cats.

Phone” is an app that allows you to manually enter a sequence of digits that are assigned to a fixed-line telephone or a wireless device.  The sequence is transmitted through a cellular network, which then interfaces with an intended recipient, who is alerted of the attempt to communicate with them by a series of tones or a ringing sound that will emanate from their device.

Once a successful connection has been established, each parties voice is converted into an electrical signal that is transmitted via radio waves much like a walkie-talkie. Unlike sending an unsolicited email which can go unanswered, feedback is almost instantaneous when engaging a prospect in this type of verbal dialogue.

“I love this app!”, says Pat Murphy, an insurance salesman. “I used to send hundreds of emails each day, but never got a response. I didn’t know if they got read, got deleted, or if they ended up in the spam folder. I never knew if the marketplace was getting my message. Now that I use the Phone app, I can engage my prospects in an actual phone presentation. When they tell me to F@&K OFF and add their number to my Do Not Call list, I know they got my message.”

Phone is available in iOS and Android.

Published June 18, 2019.

Bankruptcy Recourse in MCA Agreements

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By Pepper Hamilton LLP

In preparing a merchant cash advance (MCA) agreement on behalf of the provider, there is constant tension between the urge to include every conceivable contractual right for protecting the provider’s economic interests and the need to avoid language that might reorder the parties’ relationship in a way that renders the entire agreement unenforceable. Deciding how to address the possibility that the merchant might pursue bankruptcy poses a particularly challenging dilemma. On the one hand, bankruptcy may diminish—if not defeat—the provider’s chances for obtaining a profitable recovery of its investment. On the other hand, the concept of an investmentin future receivables necessarily envisions a willingness to accept normal business risks, including the risk of the merchant’s failure. This article explores how New York courts have treated bankruptcy-related recourse in considering the loan status of MCA agreements, and concludes with some helpful suggestions.

In K9 Bytes, Inc. v. Arch Capital Funding,1 which was decided in May 2017, the Supreme Court of New York, Westchester County noted that New York trial courts have examined many MCA agreements over the past several years and “have largely determined that most of them are not loans, but purchases of receivables.” The court elaborated that in reading through those decisions, “there are certain factors that a court should look for to see if repayment is absolute or contingent.”2 In particular, the court identified three “quintessential factors” that should be present in any MCA agreement: (1) a reconciliation provision that allows the merchant adjust its stipulated daily payments to the amount of its actual daily receipts; (2) an indefinite contract term, which is “consistent with the contingent nature of each and every collection of future sales. . .;”3 and (3) whether the provider has recourse if the merchant declares bankruptcy.4

In evaluating the relevance of bankruptcy recourse provisions, the K9 Bytescourt noted that just two months earlier in IBIS Capital Group, LLC v Four Paws Orlando LLC,5 the Supreme Court of New York, Nassau County had cited an MCA agreement’s failure to provide recourse for bankruptcy, along with other factors, in finding the subject agreement “wholly contingent [in] nature.”6 Although one of the two MCA agreements before the court in K9 Bytes expressly provided for recourse in the event of the merchant’s bankruptcy filing, and the other allowed the merchant’s personal guarantee to be enforced in such event, the K9 Bytes court did not treat such recourse as dispositive. With respect to defendant Arch Funding, the court concluded its analysis as follows:

Having weighed all of the factors, the Court finds that the Arch agreements are sufficiently risky such that they cannot be considered loans, as a matter of law. Under no circumstances could Arch be assured of repayment, because its agreements are contingent on a merchant’s success, and the term is indefinite. Accordingly, the Court dismisses the usury claims against Arch in their entirety.7

Additionally, at least one bankruptcy court has looked to similar factors when deciding a MCA company’s rights in purchased future receivables after a merchant declared bankruptcy.8 That court looked to eight factors9—focusing which party bore the risk of non-collection from the account debtor—to determine whether the transaction was a true sale. The court did not consider any individual factor to be conclusive but did expressly examine that the MCA agreement was non-recourse even if the merchant ceased operations, noting that the “only circumstance under which [the MCA company] would have rights against [the merchant] occur[ed] upon an affirmative act by the [merchant] which impair[ed] [the MCA company’s] rights in the acquired assets, such as a subsequent sale or granting of a lien on the purchased Accounts.”10

Because the merchant retained no rights in the purchased accounts, proceeds being collected by the merchant during bankruptcy in connection with those accounts were not “cash collateral,” but instead were property of the MCA company that the merchant was improperly converting. The court therefore ordered the merchant to use a credit card processor acceptable to the merchant cash advance company under the terms of the MCA agreement and directed the credit card processor to turn over purchased accounts in accordance with the MCA agreement.11

Providing that the merchant’s bankruptcy is an event of default was a key fact in a 2007 case, Clever Ideas, Inc. v. 999 Restaurant Corp.12 In this case, the Supreme Court of New York, New York County found that two contracts labeled as “advanced sales” were loans. The court found the transactions were absolutely repayable because any default (including bankruptcy or the closing of the business) would trigger payment in full.

Similarly, the lack of recourse for the merchant’s bankruptcy was cited as a positive factor in the respective state court decisions in Merchant Cash & Capital, LLC v. Sogomonyan,13 and Merchant Cash & Capital, LLC v. Frederick & Cole, LLC,14 and in the district court’s decision Colonial Funding.15

However, the authors are aware of no state or federal New York decision where the outcome turned on whether the MCA agreement provided for recourse if the merchant filed for bankruptcy. Rather, in addition to K9 Bytes, there are two older decisions in which the subject MCA agreement was found not to be a loan despite the inclusion of recourse for the merchant’s business failure.16 Moreover, a limited review of decisions from the courts of other states indicates that including recourse for the merchant’s bankruptcy is routinely considered a negative factor in evaluating whether the parties’ relationship involves a bona fide purchase and sale relationship or a usurious loan, but is not considered decisive standing alone.

In considering the relevance of bankruptcy, it should also be kept in mind that all bankruptcy filings are not the same. Specifically, a merchant’s decision to pursue debt relief under Chapter 11 could potentially benefit the MCA provider—assuming the bankruptcy court recognized the MCA agreement as a non-debt, purchase and sale relationship. Thus, treating a Chapter 11 filing as an event of default event may be both unnecessary and unwise.

In addition, there are other means for protecting against the economic consequences of the merchant’s possible bankruptcy than designating the merchant’s filing for bankruptcy an event of default in the MCA agreement. For example, the merchant’s representations and warranties should expressly provide that no filing for bankruptcy relief (under any chapter) is either planned or contemplated. If the merchant then files for bankruptcy, the provider may have an action for breach of warranty. In addition, as in the Arch Funding agreement that was upheld in K9 Bytes, it may be possible to address the effects of bankruptcy in the personal guarantee rather than making the mere fact of filing a breach of the MCA agreement itself.

Lastly, because the law in this area continues to evolve and relevant court decisions are constantly emerging, the authors advise that the surest way to ensure that your MCA agreement remains enforceable is to have it reviewed on a periodic basis by experienced legal counsel.

Endnotes

1 Misc. 3d 807, 57 N.Y.S.3d 625, 2017 N.Y. Misc. LEXIS 1903, 2017 NY Slip Op 27166 (N.Y. Sup. Ct. May 4, 2017).

2 Id. at *11.

3 Id. at *13.

4 Id. at *14.

5 2017 N.Y. Misc. LEXIS 884 (N.Y. Sup. Ct. Mar. 10, 2017).

6 Id. at *9.

7 K9 Bytes, 2017 N.Y. Misc. LEXIS 1903 at *14.

8 In re: R&J Pizza Corp., No. 14-43066 (B.R., E.D.N.Y. Oct. 14, 2014).

9 These factors were: 1) language of the documents and conduct of the parties; 2) recourse to seller; 3) seller’s retention of servicing and commingling of proceeds; 4) purchaser’s failure to investigate the credit of the account debtor; 5) seller’s right to excess collections; 6) purchaser’s right to alter pricing terms; 7) seller’s retention of right to alter or compromise unilaterally the terms of the transferred assets; and 8) seller’s retention of right to repurchase assets. Id. at *4-*5.

10 Id. at *7-*8.

11 Id.

12 Clever Ideas, Inc. v. 999 Rest. Corp., 2007 N.Y. Misc. LEXIS 9248 (N.Y. Sup. Ct. October 26, 2007).

13 2017 N.Y. Misc. LEXIS 1983 (N.Y. Sup. Ct. Jan. 9, 2017).

14 2016 N.Y. Misc. LEXIS 5084 (N.Y. Sup. Ct. Dec. 21, 2016).

15 Colonial Funding Network, Inc. v. Epazz, Inc., 2016 U.S. Dist. LEXIS 112414 (S.D.N.Y. Aug. 9, 2016).

16 MERCHANTS ADVANCE, LLC, Plaintiff, -against- TERA K, LLC T/A TRIBECA FRANK CARABETTA, Defendants., 2008 N.Y. Misc. LEXIS 10889 (Sup. Ct. N.Y. Cty. Dec. 16, 2008); Transmedia Rest. Co. v. 33 E. 61st St. Rest. Corp., 2000 N.Y. Misc. LEXIS 232 (N.Y. Sup. Ct. Feb. 7, 2000).

 

This article was originally published at www.JDSUPRA.com on June 12, 2019.

4 Benefits Of Merchant Cash Advances

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By Catherine Way

Small business owners are always looking for new and exciting ways to grow their businesses.

Staying on top of the latest trends, the top of the line software and technologies, or marketing ideas, is the only way to grow and expand your business, or get left behind.

For those that want to jump on new opportunities have access to fast funding is key!

Many small business owners are wary of merchant cash advances, due to higher interest rates, and unclear funding and approval processes.

“Merchant Cash Advances are perfect for small business owners that need fast funding without the hassle of a bank loan. Merchant Cash Advances are asset-based loans that are perfect for small business that wants to use their future sales today.” – Loren Howard, Prime Plus Mortgages, Arizona Hard Money Loans. 

Merchant cash advances do offer benefits to small business owners that cannot get traditional loans for their businesses.

No Credit Checks

Most banks and credit unions require good or excellent credit scores in order to fund any small business loans, and for those that have scores under 700, getting a traditional loan for your business can seem impossible.

With a merchant cash advance bad credit won’t get in the way of whether you can get an advance, which is a big benefit for many small business owners.

Unlike banks and credit unions, merchant cash advances do not require a credit check in order to apply!

A merchant cash advance is an advance on the credit card sales of your small business. That means that you can get an upfront sum of cash in exchange for a slice of your future credit and debit card sales. There are no credit checks as it is based on the capital of your business, unlike traditional loans that are based on your credit or personal assets.

Merchant cash advances aren’t your standard small business loan, so you don’t have to offer collateral or your credit history in exchange for the loan.

While raising your credit score can take time, with a merchant cash advance you can fund your business quickly.

There’s no risk to your personal assets, you simply use a small portion of your future sales to secure the cash you need today!

This is perfect for small business owners who have bad credit, as they can get approved for a loan quickly and a less.

Small business owners looking to get a loan fast without the hassle love that merchant cash advances don’t need their credit scores in order to fund their businesses.

faster-funding

Fast Funding

Only 1 in 5 small businesses get approved for business loans.

For small businesses in need of cash now, waiting 2-3 weeks is just out of the question.

Merchant Cash Advances makes it easy to get the funding you need, with funding in as little as 24 hours. Traditional loans can take anywhere between 2-3 weeks to approve to small business due to credit checks. Merchant cash advances can fund small business within 2-3 days at most.

That means that with a merchant cash advance you can be approved the same day, and not waiting to jump on new opportunities.

It also means that for small business owners, such as construction companies or retail stores, you can have cash in hand to fund business ventures quickly, such as restocking or purchasing new equipment. There are many costs for small business owners, and being able to cover these costs quickly can be a lifesaver.

Fast funding is essential for small businesses to take on new opportunities to build your business.

Industry Funding

In their first year, 30% of small businesses may fail or change ownership, according to a study conducted by Cornell University.

Many restaurants find it hard to fund their business, and getting someone to ever look at their business may be a struggle. Meeting with banks can be very time consuming, and chances are, might get your business funded.

Thankfully, Merchant cash advances make funding a business in many niche industries easy.

Medical offices may have to wait for payments for insurance companies, auto shops need to restock parts, and retail stores and salons need to stay on top of trends in order to keep their doors open.

All of these businesses need working capital in order to stay and business, and a merchant cash advance makes funding their business easy.

With proof of sales, you can be funded for your business now, and use your future revenue now!

Easy Ways To Pay

Merchant Cash Advances are easy to pay. Depending on your merchant cash lender, you could make daily, weekly, or monthly payments.

Unlike traditional loans which are a flat monthly fee, a merchant cash advance loan is based on a percentage of your debit and credit transactions.

Which means how much you pay varies on how much you made!

If you have a great month and have lots of revenue you can pay off a large sum of your loan, and if you had a bad month, they will only take a small percentage which won’t impact how you do business.

Depending on your lender, they can even set daily auto-payments, which will pay off your loan faster than ever!

This calculator makes it easy to determine what type of small business loan would be best for your business.

Summary:

Merchant Cash Advances are great for small businesses who need cash in order to restock, buy new software and technology, and any other plethora of situations small businesses face.

While there are many different types of small business loans, determining the best loan for your business can be tricky.

There are many benefits for using a merchant cash advance for your small business, but most small businesses love these 4 perks:

  1. Fast Funding: Merchant cash advances can fund in as little as 24 hours, much better than the 2-3 week waiting period from most banks.
  2. No Credit Checks: You don’t need a perfect credit score in order to get a loan for your small business, and a merchant cash advance only uses your business revenue to fund your loan!
  3. Industry Funding: Merchant cash advances understand the nuances of different industries, so you can get fast funding for your niche business easily.
  4. Easy Way To Pay: Daily, Weekly, And Monthly auto-payments are available! Merchant cash advances can be much more flexible than a traditional loan.

Have You ever used a merchant cash advance?

This Article Was Originally Published In Payments Journal.

Reducing The Regulatory Risk Of Merchant Cash Advances

By Clinton Rockwell, Moorari Shah and Lauren Frank

A growing number of courts and regulators have reached different conclusions on whether factoring and merchant cash advances constitute loans subject to state lender licensing and usury regulations, leaving many factoring companies and their clients without legal certainty about the nature of the transactions between them.

Companies engaged in factoring (purchasing unpaid invoices) or merchant cash advance transactions (purchasing a percentage of future invoices and credit card sales) generally take the position that purchasing existing or future receivables is fundamentally different than lending.

New York is one of a number of states that have taken that position, with courts deferring to the stated intentions of the parties involved in a given transaction in determining whether it constitutes a loan. However, in other states, most prominently California, courts have often characterized factoring and MCA transactions as disguised loans.

The issue has recently become a hot topic among regulators. In February, the California Department of Business Oversight entered into a consent order alleging that certain factoring transactions constituted loans originated in violation of California’s constitutional usury limitations and the licensing requirements of the California Financing Law.[1] In addition, the Federal Trade Commission and New York attorney general have recently launched initiatives addressing potentially unfair or deceptive practices arising from MCA transactions.[2]

Though their interpretations vary, in all 50 states the determination of whether a factoring or MCA transaction constitutes a loan is a particularized inquiry in which the courts and regulators consider all of the circumstances surrounding a transaction. As a result, while it is impossible to remove regulatory risk altogether, these transactions can be structured to reduce the likelihood of recharacterization as a loan.

Listed below are the regulatory challenges that ineluctably follow when factoring and MCA transactions are recharacterized as loans. Also included are key considerations courts take into account when determining whether these transactions constitute a loan, and provide strategies to reduce the risk of that happening.

Implications of Recharacterization as a Loan

Two dominant state regulatory schemes affect the making of loans: usury laws andlending license laws.

State lending and usury laws are generally inapplicable to purchases of receivables. Therefore, whether a factoring or MCA transaction is considered to be disguised lending or a bona fide purchase of future or existing receivables has a material effect on the laws applicable to the transaction.

While licensing and usury laws vary by state, the majority of those that consider a factoring or MCA transaction a loan impose some form of licensing on the party initiating such transactions, and apply usury limitations to them.

Violation of state licensing and usury limitations may lead to a variety of remedies and penalties, including voidance of the transaction (potentially including principal), the inability to collect payments and the imposition of fines. A recent DBO consent order involving alleged disguised lending imposed a requirement that the company at issue refund the amount of fees, expenses and costs charged in excess of the 10% annual interest permitted under the California Constitution for all factoring transactions with California-based clients in the three-and-a-half year period preceding the consent order, and pay an administrative fee of $25,000 to the DBO.[3]

While violations of licensing and usury regulations are the most common risks, if a court or regulator determines that a factoring or MCA transaction constitutes a loan, the transaction itself may carry additional litigation and regulatory enforcement risks. For instance, where factoring or MCA transactions are recharacterized as loans, regulators may take the position that such transactions are subject to state or federal loan disclosure and advertising requirements, subjecting persons involved to potential liability for violations of the federal Truth in Lending Act, federal prohibitions on unfair, deceptive or abusive acts or practices, and applicable state analogs.[4]

Note that these risks are not strictly limited to factoring and MCA transactions. Pension advances, settlement advances and litigation funding advances, among others, bear similar transaction al elements and risks and have seen increased regulatory and judicial scrutiny in recent years.[5]

In addition, factoring or MCA transactions that are not recharacterized as loans may nonetheless be subject to various regulatory pitfalls: For example, the transactions may be vulnerable to recharacterization as securities to the extent investors participate in MCA and factoring syndications with the goal of sharing in the profits.[6]

In addition, common contractual provisions in factoring and MCA transactions such as mandatory arbitration clauses and confessions of judgment have drawn fire in recent years as particularly onerous to small businesses that may rely on factoring and MCAs to pull through rough patches in their fledgling businesses where cash flow is particularly tight.[7]

Top 10 Factors Courts Consider

While courts in various jurisdictions consider a wide variety of factors in determining whether a factoring or MCA transaction is a bona fide purchase of existing or future receivables or a disguised loan, the following are the 10 factors most commonly considered, across jurisdictions (note these are factors, not a litmus test):

  1. Which party to the transaction bears the risk of loss;[8]
  2. Whether the factoring or MCA agreement, on its face, expresses an intent to enter into a loan;[9]
  3. The presence or absence of a maturity date or repayment schedule;[10]
  4. Whether the performance of the purchased account debtor is subject to a guaranty;[11]
  5. Any reconciliation between the merchant’s sales and the amount paid to the factor (i.e., whether the repayment amount is fixed or variable);[12]
  6. Whether the agreement specifically charges interest or provides a method for computing interest;[13]
  7. With respect to factoring, whether there is any notification of assignment and redirection of payment to the purchased account debtor;[14]
  8. Whether the agreement is entered into in “good faith” and without the intent to evade state usury laws;[15]
  9. With respect to factoring, whether the title to the underlying account passed to the factor;[16] and
  10. With respect to MCAs, whether the merchant defaults upon any adverse material change in its financial condition.[17]

Mitigation Strategies

Those engaging in factoring and MCA transactions can take steps to structure such transactions in a way that mitigates the risk of recharacterization as a loan, including omitting:

  • Personal payment guaranties in factoring or MCA agreements. By contrast, the inclusion of terms that increase the credit risk to be borne by the purchaser (or, stated differently, decrease the purchaser’s recourse against the seller associated with incidents of nonrepayment) are likely to reduce the risk of recharacterization as a loan.
  • Substantive provisions generally associated with a loan arrangement, such as:
    A fixed repayment schedule or maturity date;[18]
  • Interest provisions, or fees that effectively are the equivalent of interest;
  • Reserve accounts that permit the purchaser to withdraw funds for any shortfalls; and
    Any terms making a merchant’s creditworthiness or financial status a condition of performance.
  • Any right of the purchaser to collect personally from a merchant selling receivables in the event the merchant suffers a loss due to adverse business conditions, natural disasters or other factors beyond its control, or enters bankruptcy or closes the business; and
  • The use of lending terms such as “borrow,” “draw,” “disbursement,” and “finance charge.”

Conclusion

In many jurisdictions, a genuine risk of nonrepayment is critically important to avoiding recharacterization as a loan. Therefore, persons engaging in factoring and MCA transactions must balance the need to protect themselves financially with the competing need to avoid structuring transactions so as to unintentionally subject themselves to state loan licensing and usury regulations.

On the whole, state legislatures have shown little interest in clarifying the basic nature of these transactions. Until they do, it will be up to those engaging in them to stay abreast of developing case law and to structure them with care so as to avoid undue financial and regulatory risk.

Clinton R. Rockwell is a partner, Moorari K. Shah is counsel, and Lauren Frank is an associate at Buckley LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] In the Matter of the Commissioner of Business Oversight v. BAM Capital, LLC, CFL File No. 60DBO-67944 (Feb. 12, 2019) (Consent Order).

[2] See “FTC to Host Forum on Small Business Financing,” Federal Trade Commission (Feb. 14, 2019); “New York State Is Probing Abuses in Small-Business Lending,” Bloomberg (Dec. 3, 2018).

[3] See supra at n.1.

[4] See e.g., Richard B. Clark v. Advanceme, Inc., No. 2:2008-cv-03540 (C.D. Cal. 2011); Consumer Financial Protection Bureau v. Future Income Payments, No. 8:18-cv-01654 (C.D. Cal. Sept. 2018).

[5] See e.g., Consumer Financial Protection Bureau v. Future Income Payments, No. 8:18-cv-01654 (C.D. Cal. Sept. 2018); Consumer Financial Protection Bureau v. RD Legal Funding, 332 F. Supp. 3d 729 (S.D.N.Y. 2018); Oasis Legal Finance Group, LLC v. Coffman, 361 P.3d 400, 407 (Colo. 2015).

[6] The U.S. Supreme Court has identified the following four elements as pertinent to the determination of whether a security exists: (1) an investment, (2) in a common enterprise, (3) with a reasonable expectation of profits, (4) to be derived from the entrepreneurial or managerial efforts of others. See S.E.C. v. W.J. Howey Co., 328 U.S. 293, 66 S. Ct. 1100, 90 L. Ed. 1244 (1946).

[7] See, e.g., “Fintech Investigative Report,” Office of Congressman Emanuel Cleaver (Aug. 2018), available at https://cleaver.house.gov/sites/cleaver.house.gov/files/Fintech_Report_1.pdf.; see also “Agreeing in Advance to Lose? Legal Considerations in Regulating Confessions of Judgment,” Congressional Research Service (Jan. 2019).

[8] See e.g., Matter of Cornerstone Tower Serv., Inc., No. A17-4050, 2019 WL 127359 (Bankr. D. Neb. Jan. 3, 2019).

[9] See e.g., Express Working Capital, LLC v. One World Cuisine Grp., LLC, No. 3:15-CV-3792-S, 2018 WL 4214349 (N.D. Tex. Aug. 16, 2018), report and recommendation adopted, No. 3:15-CV-3792-S, 2018 WL 4210142 (N.D. Tex. Sept. 4, 2018).

[10] See e.g., Fast Trak Inv. Co., LLC v. Sax, No. 4:17-CV-00257-KAW, 2018 WL 2183237 (N.D. Cal. May 11, 2018).

[11] See e.g., Fenway Fin., LLC v. Greater Columbus Realty, LLC, 995 N.E.2d 1225, 1232-33 (Ohio Ct. App. 2013).

[12] See e.g., Yellowstone Capital LLC v. Cent. USA Wireless LLC, 60 Misc. 3d 1220(A) (N.Y. Sup. Ct. 2018).

[13] See e.g., NY Capital Asset Corp. v. F & B Fuel Oil Co., 58 Misc. 3d 1229(A) (N.Y. Sup. Ct. 2018).

[14] See e.g., In re Burm, 554 B.R. 5 (Bankr. D. Mass. 2016).

[15] See e.g., IBIS Capital Grp., LLC v. Four Paws Orlando LLC, No. 608586/16, 2017 WL 1065071, at *4 (N.Y. Sup. Ct. Mar. 10, 2017).

[16] See e.g., Coral Capital Sol. LLC v. Active Apparel Grp., No. 1004572011, 2011 WL 11076315, at *11 (N.Y. Sup. Ct. Sep. 22, 2011).

[17] See e.g NY Capital Asset Corp. v. F & B Fuel Oil Co., 58 Misc. 3d 1229(A) (N.Y. Sup. Ct. 2018).

[18] Notwithstanding, note that reconciling the merchant’s monthly or weekly purchases with any fixed payments made by the merchant may weigh in favor of a sale and purchase arrangement if the credit risk is adequately shifted to the MCA provider.

Originally Published in Law360 (May 17, 2019, 3:58 PM EDT)

Pros and Cons of Merchant Cash Advance Loans

Cash advance form on a wooden table.

Understand the nature of merchant cash advance loans, their typical requirements, and what their advantages and disadvantages are.

A merchant cash advance loan is a quick source of short-term financing for a small business merchant with an immediate need for cash. Most advances — plus fees — are repaid in within six to 12 months.

The primary requirement is you must make daily credit card transactions (which is why they are merchant cash advances, i.e., advances to retail, restaurant and service companies).

Additional conditions may apply. These include:

  • $2,500 to $5,000 monthly credit card billings, possibly higher depending on the amount of the advance.
  • Proof of at least four months history of credit card sales.
    If your business meets these conditions, here are the pros and cons of obtaining this type of loan.

Advantages of Using Merchant Cash Advances

  • Unlike with a bank loan, there is no fixed monthly payment, no interest rate or payoff date.
  • There is no collateral requirement. In the event the merchant’s business fails and full restitution for the advance not made, the owner’s assets are not at risk, as they would be with a bank loan. In fact, if a merchant’s business fails and the cash advance is not fully repaid, there is no legal liability.
  • Repayment is performed automatically based on the merchant’s credit card transactions; consequently, there is no possibility of late charges from overlooked due dates that frequently occur with bank cash loans.
  • Almost instantaneous access to funding; advances are typically made within 24 to 48 hours.
  • Better cash flow; if sales are slow for a given month, you pay less to the MCA company because they collect only a set percentage of monthly sales, without any minimum amount required.
  • Minimal paperwork.
  • If you need cash quickly, but don’t qualify for a traditional bank loan, or can’t wait for a loan decision and/or release of funds.

Banks have been stingy with lending to small businesses since the beginning of the financial crisis that began in 2007. While the economy has improved since then, credit availability has not eased up at all. Given a tight credit market, small businesses have to take advantage of whatever resources they can find. Merchant cash advances are a novel workaround to unavailable bank lending.

Disadvantages of Using Merchant Cash Advances

The catch (you knew there was going to be a catch, right?) is that a merchant cash advance is considerably more costly than traditional financing.Technically, merchant cash advances are not considered “loans.” Rather, they involve the purchase and sale of future income. The advance never lasts more than a year, so the firms putting up the financing don’t have to follow regulations on interest rates that traditional lenders are required to follow.

Still, while technically not an interest fee, if you compare it to one, the rate you are paying with an MCA is significantly higher. Tozzi notes that Leonard C. Wright, CPA and Money Doctor columnist, estimates the equivalent APR (annual percentage rate) for a merchant cash advance fee can range between 60% and 200%.

One reason the APR is so much higher is that a bank receives a monthly percentage on the balance owed, not the full amount of the loan. As the loan is paid off and the balance reduced, the interest paid is less. However, a merchant cash advance fee is a fixed charge for providing the advance. That charge can be as much as 30% of the advance. For example, the fee for a $20,000 advance could be $6,000.

Banks are regulated by federal and state laws intended to protect consumers against “predatory” lending practices. MCA providers are not similarly regulated because they are technically buying future receivables, not providing a loan. Consequently, they are exempt from state usury laws that would otherwise prohibit charging fees that greatly exceed industry standard interest rates.

This lack of regulation has led to some unscrupulous practices. These include companies advancing more money than a business has capacity to repay and cases where the cash advance company changed its billing practices without notifying the merchant borrowers.

Other potential disadvantages include:

  • Most cash advance contracts prohibit switching credit card processors; if for some reason you are dissatisfied with your credit card processor, you are stuck with them until the advance is repaid.
  • Encouraging your customers to pay in cash, to avoid a percentage of their sales going to the MCA firm, is considered a “breach of contract” and could result in litigation.

Originally Published by BUSINESS.COM EDITORIAL STAFF – Last Modified: February 22, 2017