Practice Management — 22 January 2020
How Legal Is A Merchant Cash Advance Agreement?

A merchant cash advance is somewhat like an investment. More than likely, your business is small — but growing. Someday, you expect it to be much bigger and much more profitable than it is now. An MCA agreement works like this: A financier will “advance” your business a dollar amount, not in return for future profits but in return for a small percentage of purchases made through credit or debit. For many businesses, it’s a great deal. 

But there are benefits and pitfalls, just like there are with any decision you make.

First of all, don’t worry so much about the legality of the agreement. A merchant cash advance agreement is completely legal in all fifty states. 

There are also quite a few benefits to an MCA. They’re fast! Financiers will want to check a business’s credit history before providing any funding, but it won’t take long. Need a quick cash advance? You can get one in a week or two without too much of a hassle. Sometimes it could take as little as a day!

Payments are often based on a percentage of sales, which means repaying the money will scale with the sales you make. That means an MCA won’t hurt as much as a traditional loan or investment during periods of slow business.

MCA agreements don’t require any collateral to set up. Can’t repay the loan? You won’t have to worry about the repo man coming for your vehicle in the dead of night or losing your home if you can’t afford to make payments to the financier. Still, the financier has options too. More than likely it will be built into the agreement that you will be responsible for repaying the advance even if the business fails. Still, those agreements lack the securities and binding resolutions of other more formal agreements.

What’s the catch? If you can’t pay back the money on time through current sales, then you will likely have to ask the financing company to amend the agreement. In order to do that, your business will most likely incur even greater costs. That’s why it’s so important to have a great business plan and know exactly what you’re getting into before you sign off on the agreement. If your plan is solid, then you have nothing to worry about. If it’s not, then you do.

Before you decide to sign such a deal, it’s important to sit down and discuss options with an MCA agreement attorney. A qualified lawyer can help both the business and financier in a number of ways, including potential litigation, collections, bankruptcy, contracts, securities, compliance issues, business planning, understanding laws and relevant legal regulations, and how to make decisions based on the kind of contract you want.

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Dolores Obrien

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