" I hired Spodek Law Group, P.C. for an uncontested divorce. "
Merchant cash advances have become popular in recent years. This has drawn a lot of attention not only from customers but also from other financial fields. Media attention has also been drawn to these financial products. This has given rise to questioning if they’re illegal. This has been a major concern for many small business owners who rely on the ability to receive the quick funding these financial services produce. This article will shed light on the legality of merchant cash advances and the many benefits that they provide to small business owners.
Bad credit Merchant cash advances are based on a company’s receivable balance. The history of credit card sales the company produces is used to forecast future sales. Merchant cash advances are a loan on the amount of business the company is anticipated to produce in credit sales. For this reason, they technically aren’t secured by any sort of assets and aren’t considered a loan. This also means that they’re not regulated by state and federal banking regulations. As a result, the merchant cash advance businesses are able to provide quick turnaround times. This is a major benefit to small and medium-sized businesses. A small portion of the loan balance is deducted from the daily credit sales of the company. This means that the merchant cash advance company benefits from reducing their risk exposure while still generating some revenue. The merchants benefit from being able to delay a balloon payment which becomes due at a future specified date. Companies that anticipate sales on the rise see this as a significant benefit.
Since small businesses typically have limited financial options, they’re drawn to the convenience of merchant cash advances. Often times, small business owners do not make any distinction between their business credit and personal credit and finances. While this may benefit them from a tax shelter perspective, it significantly limits their ability to borrow using traditional business methods. Business lenders typically require a significant amount of business credit is established to even be considered for a loan. Also, many banks and finance companies require that sole proprietors provide business or personal assets as collateral. This alone deters many small business owners. Many of them have already had to risk their homes and other items to get the initial financing to open their business. Coupled with a required initial equity investment, many small business owners simply don’t have any other forms of collateral available. The convenience and low-risk factor tend to outweigh the cost for many small business owners.
Options that would be similar products offered by banks would be a business line of credit. Again, a significant business credit history is typically required for these loans. Also, even if the owner of the business never touches the funds, they must still pay all the interest. Many business owners prefer being able to only pay for what they are going to actually need which is yet another draw to merchant cash advances. Also, these lines of credit require a significant amount of time for underwriting. This means that the loan can be denied several months down the line after the business owner has already counted on the money being available. Unfortunately, the reality of business lending is that it’s not a practical solution for many modern small business owners.
Merchant cash advances do come with significant price tags. This is yet another reason they’ve been heavily criticized. Clearly, many business owners consider the benefits worthy of the cost. Many banks provide similar services that would be considered to be predatory in nature as well. Allowing customers and business owners to intentionally overdraft their accounts is a similar concept with a hefty cost. The banks are able to provide the service since they’re only charging fees and not any interest charges. This would be the same concept following the logic that merchant cash advance companies are being condemned for. Legally, since the banks aren’t charging any sort of interest, they’re not providing a loan product. The fact is that many business owners benefit from merchant cash advances every day. While it may not always be the most cost-effective solution, it keeps them afloat when they may need it the most. It will be interesting to see if business lenders follow suit with offering similar products to their customers.