Merchant Cash Advances Are Not Loans

By Robert Jacovetti

A New York State Supreme Court Judge recently ruled that a merchant cash advance (MCA) is not legally a loan. This means that merchant cash advance companies would no longer be accused of usury like those who offer regular loans. A merchant cash advance is an advance on future revenue. A company will give a person a lump sum of money and the repayments are then deducted from a merchant’s revenue account each day until the advance is paid in full. However, less money is repaid when sales are low and more money is repaid when sales are higher often leading to a company being repaid at an interest rate above a state’s usury cap. However, because Merchant cash advance companies provide this specialty solution to help address cash flow issues, usury laws are not applicable.

What Are Usury Laws?

Usury refers to lending money for repayment at an interest rate above a state’s legal cap. States issue caps on interest rates to protect consumers from being exploited. Usury can be both civil and criminal. In New York State, criminal usury is capped at 25%. In Platinum Rapid Funding Group Ltd v. VIP Limousine Services, Inc. and Charles Cotton, before the New York State court, the plaintiff filed an action against the defendants for failing to honor a signed contract and the defendants asserted a usury defense. The judge in the case stated that:

“Plaintiff took the risk that there could be no daily receipts, and defendants took the risk that, if receipts were substantially greater than anticipated, repayment of the obligation could occur over an abbreviated period, with the sum over and above the amount advanced being more than 25%. The request for the Court to convert the Agreement to a loan, with interest in excess of 25%, would require unwarranted speculation, and would contradict the explicit terms of the sale of future receivables in accordance with the Merchant Agreement.”

Essentially, the judge indicated that because MCA agreements are a factoring arrangement, the interest rates are typically higher and are riskier than a loan agreement for all parties involved in the arrangement. For instance, in most MCA agreements a person is not required to pay back an advance in the event that his or her business fails. This means that there is no guarantee that MCA companies will be repaid when providing a person with an advance, whereas, loans from a financial institution are expected to be completely repaid.

An MCA is a viable alternative for business owners that are facing financial difficulty and are unable to qualify for a loan due to factors such as poor credit. However, it is important to speak with an experienced merchant cash advance attorney who can review the agreement and advise you in order to help ensure that your rights are protected.

The Jacovetti Law, P.C. is experienced in merchant cash advance matters, including debt resolution. Our merchant cash advance lawyers will work with clients to assess their debt situations and advise them on the best path to financial stability. To schedule a free 15-minute telephone consultation or office visit, contact our New York debt relief law office at (516) 217-4488 or fill out our contact form.