When it comes to lending, there is a tremendous imbalance in consumer lending and business lending. Consumer lending ranks at the top of the most highly regulated, while business lending is very near the bottom. There are compliance regulations for business lenders, yet the regulations for business lenders are just a fraction of what consumer lenders face.
Merchant cash advances and factoring falls even lower on that list than business loans. The companies that offer these financing products do not view them as loans. Essentially, a factoring company buys invoices at a discount, and MCA providers purchases future receivables at a discount. It is not a loan, but a sale, they tell merchants. Thus, a traditional lender extends liabilities (loans), while these alternative providers purchase assets.
There is very little regulation around factoring and merchant cash advances. There is a lot of grey area involved. So, when a bill is introduced – like the SB 1235 in the California Senate – addressing these products, the industry takes notice.
Some of the issues the SB 1235 bill addresses include:
- It would require companies offering covered commercial financing to provide a written statement before the completion of the transaction.
- The statement