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Lending Regulation Spotlight: Merchant Cash Advance

A judge striking a gavel in court

Merchant cash advance (MCA) is one of the most common forms of alternative lending. In fact, chances are, if you’re reading this, you probably offer MCAs to your customers. 

Although still somewhat the wild wild west of alternative lending, recent developments have occurred with merchant cash advance regulation in a number of U.S. states. These developments, although limited to only a few states for the time being, could signal looming changes for the entire industry. 

In today’s article, we are going to review these new laws and take a look at what they might mean for your SME lending business.

Merchant Cash Advance Regulation: An Overview

Before we get into today’s topic, reviewing the current state of MCA regulation (and some MCA history) will help us better understand the “why” behind the recent trends in the sector. 

MCAs are classified as commercial transactions, so they’re not regulated by the federal government like traditional bank loans, which, for instance, have usury laws. But MCAs are still subject to state laws applicable to commercial transactions like the Uniform Commercial Code (UCC), which assure the borrower that the terms of the contract will be enforced.

Remember, MCAs are used by SMEs to access quick funding. Cash comes fast for SMEs, but payment terms tend to be less favorable than traditional business loans. 

As more businesses turn to MCAs to obtain financing, and with the segment forecasted to grow at 15.5% CAGR until 2028, regulators are increasing their oversight to ensure fair financial practices for all parties involved in MCA contracts.

The main takeaway? This is a relatively young product that is still evolving, both in terms of use cases and regulatory oversight.

3 Recent MCA Regulation Developments

States across the country are realizing the need to enforce laws to protect SMEs who access alternative forms of credit.

It’s important for SME lenders to familiarize themselves with the lending regulations and laws that apply in the states where they operate. And, to keep up to date as new ones are introduced.

Let’s go over three recent MCA lending regulation developments across the U.S.

1. New York: Transparency and Disclosure Regulations

In January 2022, the state of New York passed a disclosure law that requires non-bank lenders to provide specific disclosures in the loan paperwork for corporate and small business borrowers.

It applies specifically to merchant cash advances and other forms of commercial financing, where the financing amount is less than $500,000.

Similar to the federal Truth in Lending Act (TILA) law, the idea is to create more transparency about how much is being borrowed, and under what terms.

In an MCA agreement, lenders must disclose:

  1. Total amount of commercial financing and disbursement amount.
  2. Finance charge.
  3. Annual percentage rate (APR).
  4. Total repayment amount.
  5. Terms of financing.
  6. Amounts and frequency of payments.
  7. Other potential fees and charges.
  8. Prepayment charges
  9. Collateral requirements or security interests.

New York follows California, where a similar law was recently passed.

2. California: Commercial Financing Disclosure Regulations

Approved in mid-2022, California enacted Senate Bill 1235 in 2018. 

Like the New York law, it was created to protect borrowers by providing them with more transparency in credit agreements

Lenders must deliver cost of credit disclosures to borrowers whose business is directed or managed from California.

The regulation imposes:

  • Formatting and content requirements for each category of commercial financing.
  • Signature requirements for all parties involved (including e-signature guidelines).
  • Rules for determining the availability of a statutory exemption for transactions of more than $500,000.

The final regulations also require disclosures of annual percentage rates (APRs) and include category-specific rules for calculating or estimating APRs and finance charges. In response to these regulations, many MCA lenders are turning to advanced loan management platforms (like Onyx IQ) to help with APR calculations. 

To learn more about CA’s new disclosure requirements, check out this great write-up from law firm Austin, LLP.

3. Utah and Virginia: Registration and Disclosure Requirements

Utah and Virginia have also recently passed laws that not only require lending disclosures, but also require that providers of merchant cash advances register and obtain a license with the state.

According to Utah’s Commercial Financing Registration and Disclosure Act:

  • It’s unlawful for a person to engage in a commercial financing transaction unless registered with the Utah Department of Financial Institutions.
  • The law applies to anyone who completes more than five commercial financing transactions in Utah during any calendar year.
  • Providers must give certain disclosures before completing a commercial financing transaction.

Utah’s law applies broadly to many forms of non-mortgage small business financing, while Virginia’s law aims explicitly to regulate MCA providers. Virginia’s more specific requirements for MCAs also include additional regulations for sales-based financing brokers. 

Keep an open eye, as other states such as Missouri (House Bill 584), New Jersey (Senate Bill 819), and North Carolina (House Bill 969) are also in the process of introducing more lending regulations for MCAs and general commercial financing.

But it’s not only regulations you should be taking note of: the SME lending industry is on the move, and we have our own predictions for where it’s heading.

Alternative Lending Regulation Is On The Horizon

If your lending activity is spread out across a number of U.S. states, it is crucial to keep up with the specific disclosure and registration regulations for each. At Onyx IQ, we’re prepared to help you meet your state-specific compliance needs.

We will provide updated products and features to help you adhere to new compliance regulations as they arise (as well as providing ongoing analysis), so be sure to check back to Onyx IQ to stay up to date. 

Interested in learning more? 

Reach out to us here to speak to one of our SME lending experts or here if you are interested in scheduling a demo of our industry-leading loan management software. 

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