There’s been a lot of talk about merchant cash advances, recently. Many people have even questioned whether or not they’re illegal. This question is interesting. It’s suspected that many banks and other lenders question the legality because they just seem too convenient to be legal. This article will explain what merchant cash advances are and whether or not they are indeed, legal.
Most people understand the term “cash advance” from using credit and charge cards. When we are short on cash, we simply go to an ATM or bank and withdraw funds as an instant loan against our credit. The process is simple and beneficial to many people who need cash for an emergency, unexpected expense, or simply just need cash in hand. The fees and interest rates with these advances vary from card to card. Some credit cards offer no fees and low interest rates for the service. Others cards offer interest rates and fees that are higher than what’s charged for a purchase. Customers who are conscious of interest and fees typically avoid using cash advances to save money. This is different than an optional overdraft allowance from a debit card. This is typically a very expensive service as banks are allowed to charge the customer non-sufficient funds fees. This can be quite expensive and most people try to avoid using the service unless absolutely necessary.
Merchant cash advances work in a different manner than these other services. They provide companies with cash flow if sales happen to be in a slump. The funds can be used for a variety of other reasons as well. Business upgrades and covering payroll sometimes make it necessary for business owners to seek out this type of service.
Merchant cash advances are technically not loans. They work by lending on future sales and income. They’re typically provided by credit card processing companies. Due to them not being a loan product, there isn’t much regulation of these products. The draw to them is that they’re able to provide a business owner with cash without having a lengthy underwriting process. Invoice factoring is a similar service that has recently become popular. This service uses outstanding invoices and receivables balances as the basis for the loan. Both services are typically able to be funded on very short notice. Many small business owners who need the cash immediately often will turn to this service due to its quick processing and funding time. Another benefit that small business owners enjoy with merchant cash advances is that the payments are simply deducted from their daily credit sales. The bulk of the loan becomes due at a future date. The daily credit deduction is a small amount that’s also applied to the balance.
Opponents of the services argue that these services should be considered loans. Some even go as far as to challenge the legality of the services. Obviously, at this time merchant cash advances are certainly legal. The opponents claim that the services are priced much higher than any loan product and should be subjected to usury laws. The problem with this is that while the fees may be higher than a typical loan, the services are highly sought out by small business owners. To take away the convenience factor could harm many businesses. Also, the fees and small payment amounts aren’t considered to be harmful to these customers. For this reason, this source of funding is critical to the small business community.
The problem with business owners seeking out other sources of funding is that often they’re often unable to qualify for a traditional loan. Even business lines of credit require a significant and well established business credit record. Many new small business owners wouldn’t be able to meet these requirements. Merchant cash advances offer these businesses the cash they need. Another point to consider is that many small business owners tend to experience unexpected events and emergencies. Getting a loan is simply not an option when an expense needs to be covered almost immediately. In summation, merchant cash advances provide small business owners with a valuable service. They’re able to easily qualify and are able to use the money to cover things that may be critical to the business’s survival. These options should continue to be a product that’s accessible to small business owners.