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 will also include disclosures about the following items: total amount of fees, the amount provided, term length, monthly payment, total dollar cost, collateral required, policies regarding repayment and prepayment, annualized interest rate, and APR.
- The bill requires that the statement be signed by all parties to the transaction and meet certain requirements (e.g. specified font size, language used in discussions/negotiations, etc.).
- It will also be required that the APR for cash advances be calculated based on the daily, weekly or monthly delivery of receivables as per the offer.
However, the bill does not require factors and MCA providers to be licensed, and there is no guidance on how to calculate interest rate for factoring and cash advances.
Factoring and merchant cash advance providers have become increasingly popular in recent years as banks began turning more and more businesses away, the aftermath of the Great Recession. Two of the most attractive benefits of working with an MCA provider is the simplicity of the application process and the speed in which essential business funding is received. Even merchants with poor or no credit can secure the cash they need – unlike working with a bank.
Author Bio: As an account executive, Michael Hollis has funded millions by using alternative funding solutions. His experience and extensive knowledge of the industry has become a true asset for First American Merchant.