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Fair Play in Merchant Cash Advance Contracts

As the merchant cash advance (MCA) sector matures, industry leaders are developing voluntary standards for what constitutes fair play in cash advance contracts. For merchants shopping for funding, these best practices serve as a litmus test for reputable merchant cash advance providers.

A Reputation to Uphold

Unlike business loans, merchant cash advances offer instant access to capital in return for a portion of future credit card receipts. Cash advance providers are careful to avoid calling the funding a business loan; rather, they "finance small and mid-size merchants by buying their future credit card sales at a discount."

Since the transaction is not technically a loan, it falls outside the purview of financial regulators. To preserve the integrity of the business, a number of merchant cash advance companies have banded together to regulate the sector. The North American Merchant Advance Association (NAMAA) aims to discourage fraud and promote responsible commercial funding. The groups president Jeremy Brown explains, "We see some practices in the marketplace that we dont agree with and we wanted to bring some structure to the industry." By defining best practices for their unique business funding model, NAMAA members hope to weed out the unscrupulous cash advance companies who could tarnish the image of merchant cash advance funding.

NAMAA offers the following guidelines to help merchants distinguish the fraudulent from the reputable MCA companies:

  1. Inappropriate Terminology. Inappropriate terminology can create confusion in the terms of the contract. NAMAA warns of MCA providers "referring to the transaction as a loan, or... including personal guarantees." Merchants should make sure they understand the terms used in the contract. This is particularly important when merchants contract with a provider for a variety of products including an MCA.
  2. Risk Management Processes. A reputable merchant cash advance company has underwriting processes in place to quantify risk. From the merchants perspective, responsible funding entails the collection of information and a screening. Of course, one of the draws of merchant cash advance funding is quick turnaround time. Businesses can often have cash in hand within a week of contacting a MCA provider. But merchants should beware of MCA providers who are willing to close the deal without performing some due diligence on the applicants business performance first.
  3. Collection Tactics. The MCA industry sets out standards for appropriate collection tactics. These include appropriate collection rates to ensure that the client retains enough of their credit card receipts to function profitably.
  4. Fixed Retrieval Rates. In addition, industry best practices take aim against predatory MCA providers that embed steep rate hikes in the contract, or those that reserve the right to change retrieval rates at will. A reputable merchant cash advance funding partner clearly identifies the retrieval percentage in the contract. Changing that percentage requires written consent from the merchant.

Merchants searching for business funding can vet potential MCA partners based on their adherence to industry best practices. Clear communication between client and provider is in both parties best interest, ensuring a long and mutually beneficial financial relationship.


North American Merchant Advance Association

MCA Best Practices

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