Merchant Cash Advance Regulation: Does It Exist? What You Need to Know

Updated on September 8, 2020
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Does Merchant Cash Advance Regulation Exist?

If you’re a small business owner looking for quick business loans with little hassle, then a merchant cash advance probably looks like a pretty good deal to you. Online applications, same-day business funding, and little documentation needed? Sounds just like what you need. But before you act on applying for a merchant cash advance, proceed with caution: Merchant cash advances are the most expensive financing option on the market.

Their steep costs paired with the qualification ease has recently put merchant cash advances under scrutiny. Is there merchant cash advance regulation? Why would merchant cash advances need to be regulated in the first place? We’ll walk through the state of merchant cash advance regulation in this complete guide.

First Things First: What’s a Merchant Cash Advance?

Let’s cover the basics of a merchant cash advance. A merchant cash advance is unlike other business loans—in fact, it isn’t technically a loan.

A merchant cash advance is, well, an advance. In this type of financing, a merchant cash advance company or provider advances you an upfront sum of cash in exchange for a slice of your future credit and debit card sales. Because the company is purchasing your future credit card sales, a merchant cash advance isn’t a loan.

When you go into a merchant cash advance agreement, you’ll settle on a fixed percentage that the merchant cash advance company will take from your credit and debit card sales every day (or sometimes every week). The merchant cash advance company will continue to take this fixed percentage—plus fees—until the advance is paid in full.

What Kind of Rates Come With a Merchant Cash Advance?

In most scenarios, you get quoted a factor rate with your merchant cash advance. Unlike an interest rate, a factor rate is in decimal form. The typical factor rate for a merchant cash advance ranges from 1.2 to 1.5.

When you get quoted a factor rate, be sure to multiply the factor rate by the total advance amount—that tells you the total amount that you need to repay the merchant cash advance company. The factor rate you’re quoted on your merchant cash advance offer varies based on your risk assessment. If the merchant cash advance provider has reason to believe that you’ll probably be bringing in enough credit card sales to repay the merchant cash advance in full, then you might see a factor rate on the lower end of the aforementioned scale.

However, if you’re a riskier merchant—with a lower credit score, or more volatile credit card sales and revenue—you could be quoted a steep factor rate. This gives the merchant cash advance provider assurance that they’ll get most of their money back even if you default on the advance repayments. In the end, the riskier you are to work with, the higher the factor rate you’ll get. And a higher factor rate means you’ll pay more in fees.

A Merchant Cash Advance In Action

Now that you’ve got the general gist of how a merchant cash advance, let’s look at an example of a merchant cash advance. Say you run a coffee shop, and you need an infusion of about $20,000 of capital. You don’t have time to wait around for approval from a bank or longer-term lender, and plus, you probably can’t qualify for one anyway.

Your credit history, time in business, and annual revenue just isn’t there. So you turn to a merchant cash advance provider for that $20,000. You’re approved for a $20,000 merchant cash advance, with a factor rate of 1.35. All in, you’ll need to pay $7,000 for a total of $27,000.

However, when you consider how quickly you need to repay your merchant cash advance, you’ll realize how expensive they can be. Say that the merchant cash advance provider plans to take 15% of your daily credit card sales, and that you usually bring in about $10,000 a month in credit card sales. This means that you’ll make 216 daily payments of about $125 each day. All in, that’s an effective APR of 106.66%—making the merchant cash advance look more expensive than it originally seemed.

What to Watch Out For With a Merchant Cash Advance

There are without a doubt benefits to this type of small business financing. If you don’t qualify for any other loan options and you need quick capital, a merchant cash advance might be your only option. And if getting capital for your business is a make-or-break situation for your future, then you’ll be happy that a merchant cash advance is available to you.

However, there are lots of reasons why small business owners should approach merchant cash advances carefully—and why people are calling for merchant cash advance regulation (we’ll get to that in a minute).[1] Here are some dangers of a merchant cash advance:

  • Sky-high APRs

    When you’re quoted a factor rate on your merchant cash advance, it might not look too bad. But when you convert your factor rate to APR, you’ll find that the cost of the advance skyrockets. Merchant cash advances are known to come with triple-digit APRs.

    They’re widely accepted to be the most expensive financing option on the market. Be careful before you accept a merchant cash advance offer without checking what your effective APR will be. If you need an easy way to see if your advance is too expensive, use our free merchant cash advance calculator to plug in the numbers.

  • Steep daily payments

    A benefit of a merchant cash advance is that the provider takes a fixed percentage from your daily credit card sales. So if you’re having a slow month in credit card sales, the merchant cash advance company will end up taking less from your pool of sales.

    However, if your credit card sales continue as expected or even increase, then you’ll be paying more every day in repayment. For cash-strapped businesses, high daily payments can really hurt cash flow. And because your APR depends on how fast you repay the advance, higher sales means higher APR.

  • Debt-cycle dangers

    Another reason why merchant cash advances are dangerous is the potential of debt-cycles. Because they’re so expensive and need to be paid back very quickly, you could find yourself needing to apply for another one for more capital soon after you apply for your first one.

    Taking on more and more merchant cash advances can cause cash-flow strain, which in turn puts you at risk of default.

Those are just a few of the reasons why you should watch out for merchant cash advances.

Merchant Cash Advance Regulation: What You Need to Know

The amount of red flags that come with merchant cash advances bodes the question: Is there merchant cash advance regulation? The answer is, there really isn’t merchant cash advance regulation. Here’s what it comes down to.

Why There’s No Merchant Cash Advance Regulation

Remember how we said that merchant cash advance companies purchase your future credit card sales? A merchant cash advance isn’t a loan—it’s a sale. And because it’s not a loan, merchant cash advance companies aren’t subject to the same federal regulatory oversight other lenders are.

Other lenders are bound by state usury laws that inhibit them from charging high-interest rates.[2] In 2016, a New York State Judge ruled that as long as a merchant cash advance is definitely not a loan, then merchant cash advance companies aren’t subject to usury laws.[3] The fact that merchant cash advance companies technically aren’t “lenders” is a technicality that allows these providers to operate in a largely unregulated market—and charge steep interest rates.

Technically, merchant cash advance regulation comes from the Uniform Commercial Code in each state.[4] But because they aren’t subject to usury laws or the Truth in Lending Act, merchant cash advance companies can charge much higher interest rates than other small business lenders, and they don’t have to prevent their costs in the same way—making it confusing for borrowers to distinguish the true cost of the advance.

Are We Moving Toward Merchant Cash Advance Regulation?

As alternative lending becomes more popular, all online, non-bank lenders will be put under scrutiny. Merchant cash advance companies are starting to be looked at with an especially critical eye.[1] But are we moving closer to merchant cash advance regulation? In terms of how much merchant cash advance companies can charge in interest, no. As long as a merchant cash advance is still a purchase of receivables—and not a loan—these companies won’t be subject to usury laws that prevent lenders from charging interest rates.

There’s hope that the industry is moving toward self-regulation, however. Although this is more of a tactic to avoid future federal regulation, it could be steps in the right direction. This self-regulation could entail mandatory documentation of training on how to sell these products—and present their cost in a transparent way. Generally, it’s clear that some type of government regulation will need to step in to oversee the online lending space.[1] But it’s not clear if that regulation will be merchant cash advance regulation.

Likely, it will be regulation of online small business lenders, which still might not affect merchant cash advance companies. If merchant cash advance regulation happens in the future, it will likely be to require industry-wide rate disclosure, rate limitation, and other measures to prevent predatory lending. This will not only protect small business owners who can’t afford to take on such expensive debt, but also help legitimize the small business lending industry as a whole.

How to Protect Your Small Business

Without merchant cash advance regulation, you need to approach these financing products with absolute caution. If they’re really your only financing option, then you need to make sure you’re taking steps to protect yourself when pursuing these advances. Without merchant cash advance regulation, be sure to:

  • Vet the merchant cash advance company

    Don’t work with just any merchant cash advance company that offers you fast cash right away. Get to know the provider. Do they have an established website? Could you call them and talk with a specialist in person? Do they have reviews where you can look at other business owners’ experiences working with them? Seeing that other business owners like yourself have successfully worked can help inform your decision to work with them.

  • Convert the pricing structure to APR

    The lack of merchant cash advance regulation means that these providers can quote their price in any way they want. Whereas most other lenders need to provide their interest rate and APR, a merchant cash advance company can give as much information as they please. If you’re only quoted a factor rate, be sure to convert your rate into APR to get a full picture look at how expensive the advance really is. You should also use a merchant cash advance calculator to get a sense of how much you could be paying back in daily payments—and whether your cash flow can sustain that level.

  • Consult a trusted financial advisor

    If you take a look at some of the examples above, you can tell that the merchant cash advance space is confusing. And the lack of merchant cash advance regulation contributes to that. Because the details on a merchant cash advance offer can be deceptive, consult your financial advisor or your accountant. A person who understands the financial terms—and most importantly, understands your business’s financials—can help you decide whether or not you can really afford to take on a merchant cash advance.

Make Sure to Shop Your Options

Without merchant cash advance regulation, you need to protect yourself by being a smart shopper. Another way to avoid taking on debt that’s too expensive is to do your homework: Is a merchant cash advance really your only option? You won’t know that you really need to take on a merchant cash advance until you’ve fully compared all your other lending options.

That way, you can be confident that you wouldn’t find lower rates with a different product or a different lender. And when it comes down to it, there are other financing options for business owners who need fast cash or don’t qualify for other financing options. If that’s you, two good lending options to check out are short-term loans and shorter-term lines of credit.


While there’s no substantial merchant cash advance regulation protecting borrowers just yet, there are steps you can take to be cautious. In the end, don’t rush into a product if you aren’t confident you’ll be able to pay it back. Even if you need financing today, or don’t qualify for anything else, you need to take the steps to put your own merchant cash advance regulation in place!

Georgia McIntyre
Director of Content Marketing at Fundera

Georgia McIntyre

Georgia McIntyre is the director of content marketing at Fundera.

Georgia has written extensively about small business finance, specializing in business lending, credit cards, and accounting solutions. 

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