Cash Advance Laws for Merchants

• Cash advances are becoming a stable source of income for small businesses.Cash image by Greg Carpenter from Fotolia.com
  
  In a changing economy, the financial stability of small businesses is becoming uncertain. Small businesses are beginning to make use of merchant cash advances, especially when traditional small business loans are not an option. Before settling on a merchant cash advance transaction, certain rules and regulations must be followed to protect the small business's best interest.
  
  

Merchant Cash Advance

• The Electronic Transaction Association (ETA) defines a merchant cash advance as a product that is being offered to small businesses that accepts credit card payments. The amount of the advance depends on the volume of the credit card sales that the small business will process in the near future. The repayment terms are based upon the merchant's business volume. The agreement does not include a minimal repayment amount or time.
  
  

Loan vs. Sale

• Depending on the legal terms, a merchant cash advance can be considered a loan or a sale. Typically because cash advances do not have minimal payback requirements, they are listed as sales. AdvanceMe, a merchant cash advance provider, states they purchase a portion of the future credit card receivables at a discount. For example, a cash provider may give a business $100,000 and in exchange the provider will receive $130,000 of future credit card sales. The merchant collects a fixed percentage of the credit card sales until the agreement is fulfilled.
  
  Cash advances that are intentionally scheduled as a loan must be paid back in a set time at a set amount. Whether or not a cash advance is considered a loan depends on how the provider treats the transaction.
  
  

Rules, Regulations and Laws

• The regulation of a cash advance depends on how the transaction is treated. Cash advances structured as loans are subject to the usury law. Usury is a legal term used to indicate that the interest rate exceeds the maximum rate permitted by state law. Whether or not an interest rate is set depends on the individual state. Many states do not have a maximum interest rate on business-to-business transactions.
  
  Merchant cash advances that are structured as sales do not need to comply with the state's usury law. Inc.com reports 25 percent as the typical fee, a rate more costly than traditional bank loan financing. Some companies have higher fees. Sale structured cash advances do not fall under lending regulations because they are not loans.
  
  During bankruptcy, merchant cash advances are treated differently from loans. Merchant cash advance agreements are not discharged in bankruptcy. The providers are still able to pursue collection even after the business has filed bankruptcy.