MCA Regulation? TransMark Funding Helps to Keep You Out of Harm’s Way
Disclaimer: This blog is related to merchant cash advance (MCA) funding, not loans. If you’re doing business with a funder who is also properly licensed to process loans, then that’s a different animal, and this is not related to them. But……maybe it is.
Personal Guarantees: PG isn’t just a movie rating, it’s a legally dangerous thing in the MCA business. Having a PG makes an MCA look more like a loan. If the funder is purchasing a receivable (which is what an MCA is supposed to do), then why do many funders have PG phrases in their contracts? Take a look at the next merchant contract. Many have signature lines for the merchant that actually say “GUARANTOR” underneath them. Why does this put YOU in legal harm’s way? One, you may have unwittingly lied to the merchant saying there is no personal guarantee. Two, what if regulators later determine this was a loan? Are you properly licensed? Did the “loan” have all the proper federal disclosures or did you just break a bunch of laws? TransMark is an MCA funder. We don’t loan. We buy future receivables. Our contract does not have a personal guarantor.
CLICK HERE and you’ll see a copy of an actual signature page from a very large, very well known funder in the MCA industry (don’t worry, names have been removed, to protect the guilty). If they don’t require a PG, then why do they refer to the merchant’s signer as “Owner/Guarantor”? Are you telling merchants there’s no PG and then signing them up with this type of funder?
Cash Advances based on Cash Flow, Revenue, or Deposits: Are you doing business with a funder who bases the amount of advance on the merchant’s revenue or cash-flow, and not on their actual receivables (such as credit card processing)? Remember, this is the Merchant Cash Advance business, not the loan business. In order for a funder to provide a merchant capital in the MCA field, they are (or should be) purchasing a known, verifiable receivable. When TransMark does an MCA deal, we are purchasing a known and verifiable receivable from the merchant, and giving them cash (advance) for it. It’s a purchase, not a loan. Be very careful sending apps to an MCA funder who will base an advance on anything but a known and verifiable receivable. You may think it’s great business and more income for you, but you may not feel that way when the legal and/or regulatory hammer comes down on the funder and then they look towards the agents who may have acted as a loan broker in the process, without being properly licensed. We do things the right way and steer us both clear of this sort of legal hazard.
Collateral or UCC Filings: UCC filings risk you losing the customer, but that’s another blog entry (coming soon). The staying-out-of-legal-harm’s-way issue is more of the same. MCA’s purchase receivables. If you take collateral such as a UCC filing (which TransMark never does), you are offering….um….a…. secured loan? Again, same old song and dance. Lack of licensure. Lack of federal disclosures. Potential liability that could shut you down, or worse.
Consent of Judgment: A COJ is simply a document that stinks to high heaven. It purports to create a judgment upon the breach of contract without a merchant being allowed to defend himself in court. COJ’s are illegal in many states and our legal advisers say many more state courts would hammer a buyer or creditor who utilizes this un-American tactic. So we at TransMark do NOT use them.
Stacking – Just about every MCA funder has language in their merchant contract that prohibits stacking. But yet, nearly every funder seems glad to fund a 2nd position, or a 3rd position, or even higher (many advertise it). We don’t mind calling out egregious terms in other funder’s contracts, but we do NOT stack against them. We don’t want to be stacked, and we don’t stack on anyone else. There are companies out there itching to sue someone for tortious interference. We stay clear of that bullseye, which helps you stay clear too.
You may ask, “Why is little ole TransMark so much more compliant, so much more sensitive to regulation and legal liability, than the other guys? One of our principals is a very accomplished trial lawyer, with several lifetime achievement awards, who has made a living for three decades suing companies that overstep their bounds. We shall stay on the merchant cash advance rock and not wander off into the molten lava.
Here’s how it works. Unlike lenders who provide less-than-desired advances based upon a suggestion or hope of future advances, the periodic MCA commits the funder (TransMark) to two additional installments after the initial advance, in roughly 45 day increments, where the merchant has otherwise been compliant with the terms of the first advance. It’s more than just a “we’ll see.” It’s more than just keeping your fingers crossed. It’s a contractual agreement to advance more funds, where contract terms are satisfied.
There are no new processing charges in the future advances. They are not a “renewal,” where all the prior advance and funder profit are paid off, avoiding the difficult accumulation of receivables that must be sacrificed. Importantly, unlike the traditional “add on,” the second and third periodic advance come before the account is paid down to 50% of receivables purchased. You cannot find that anywhere else in the industry.
The limitations of the periodic advance are predictable—total sums being less than monthly credit card receipts and sudden drop offs in credit card sales disqualifying future advances. But like a tradition advance, it can be the competitive edge, or the thumb in the dike, that causes merchant business to flourish.
“A merchant cash advance (MCA) is great for businesses short on cash that need funds quickly and process many sales with credit or debit cards.” Nasdaq.com (Aug. 6, 2016).