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Guide to Merchant Cash Advances: Regulations & Brokers

Guide to Merchant Cash Advances: Regulations & Brokers; Are merchant cash advances legal? Learn all you need to know about merchant cash advance regulations and brokers when doing your small business due diligence.
Kelly Boyer Sagert
Kelly Boyer SagertUpdated December 17, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Some small business owners may wonder: “Are merchant cash advances legal?” The short answer is yes. A merchant cash advance (MCA) is a legal option for small businesses to consider when seeking funding. As with all financial decisions, choosing whether to use one should involve considering both pros and cons.

How Do Merchant Cash Advances Work?

At a high level, here’s how merchant cash advances work. An MCA is a type of financing for small businesses (also known as “merchants”) that accept credit card/debit card payments from their customers. When a small business applies for and is approved for this type of financing arrangement, it can get funds advanced from merchant cash advance companies.The small business then usually repays the advance in one of two ways. First, the cash advance company could take an agreed-upon percent of the small business’s credit card and debit card sales revenue each day. Alternatively, it could directly withdraw funds from the merchant’s bank account on an agreed-upon schedule through an ACH transfer. MCA providers may also accept other repayment arrangements stemming from your credit card and debit card sales revenue.Rather than charging an interest rate, this type of funding has a factor rate — often ranging from 1.1 to 1.5. Unlike interest rates, which are given as percentages, a factor rate is expressed as a decimal figure. The factor rate is then used to calculate the cost of financing for the small business borrowing the funds.The rate a company is charged can depend upon how much of a risk it poses to the lender. Factors considered when setting a rate can include the industry the company’s in, the company’s financial history, its credit and debit card sales, and its years in business. To calculate the amount owed, you multiply the advance by the rate. For example, consider a $10,000 advance at a 1.4 factor rate. That’s $10,000 x 1.4 = $14,000. This would not include any fees charged.Next, let’s consider the regulations that affect MCAs.

Merchant Cash Advance Regulation Overview

MCA regulation is generally not as stringent as small business loan regulation, but regulations do exist.The Federal Trade Commission (FTC), for example, has the authority to sue merchant cash advance providers that engage in deceptive or predatory lending practices.Here are some of the federal laws that merchant cash advance providers are expected to abide by:
  • Federal Trade Commission Act (FTCA)
  • Gramm-Leach-Bliley Act (GLBA)
  • Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act
The FTCA has provisions that prohibit unfair and deceptive trade practices. The GLBA, meanwhile, has provisions that prohibit creditors from making false statements to obtain a customer’s bank account information. These laws apply to MCA providers.Section 1071 of the Dodd-Frank Act requires covered financial institutions — including merchant cash advance providers — to collect and report to the Consumer Financial Protection Bureau (CFPB) data on small business applications for credit.State usury laws may not apply against merchant cash advance providers, but some states as of 2023 have implemented regulations affecting nonbank financial companies. New York and California, for example, have state laws requiring MCA providers and other nonbank lenders to provide disclosures similar to those required under the Truth in Lending Act.Any merchant cash advance provider that engages in unfair or deceptive trade practices can be subjected to compensatory damages, civil penalties, and a permanent injunction from marketing, selling, or collecting merchant cash advances.

UCC Regulations

Companies offering merchant cash advances typically conduct business under the Uniform Commercial Code (UCC).The UCC isn’t a federal law. Rather, it’s a collection of proposed model laws covering the conduct of business and commercial contracts. All 50 U.S. states have adopted the entire UCC, with the exception of Louisiana, which only adopted parts of it, according to the Louisiana Department of State.When you sign your merchant cash advance funding agreement, the MCA provider may file a UCC lien in your state. This lien becomes a public record documenting how the MCA provider has a security interest in your business assets as collateral on the debt.If you default, the MCA provider may take action to seize the assets. Alternatively, if you pay off your MCA and the provider does not remove the lien, you generally have the right to get it removed under UCC regulations.Recommended: Secured vs. Unsecured Loan


Some merchant cash advance companies may agree to abide by the Small Business Borrowers’ Bill of Rights. The Responsible Business Lending Coalition pioneered the creation of the Small Business Borrowers’ Bill of Rights, and elements of it include:
  • The right to transparent pricing and terms 
  • The right to nonabusive products
  • The right to responsible underwriting
  • The right to fair treatment from brokers
  • The right to inclusive credit access
  • The right to fair collection practices 
If you decide to obtain funding through an MCA, it may make sense to find out whether the MCA company you’re considering will honor these rights.

What Are Merchant Cash Advance Brokers?

The fourth bullet in the bill of rights described above focuses on brokers. A merchant cash advance broker is someone who connects companies that need financing with funding companies that can provide them with the money they need.These brokers typically get paid on a commission basis. These commissions and the ways in which MCA brokers treat customers can vary, as implied by the bullet point in the bill of rights. If you decide to use a broker, you may want to choose one recommended by a trusted friend or colleague. 

Using Merchant Cash Advance Companies

There are a number of reasons why a small business might want to use an MCA. Small businesses may decide to use an MCA to fill in gaps in cash flow and to cover unexpected expenses. Some might use one to tide over seasonal fluctuations or to buy inventory.This type of funding may be right for you if you aren’t able to get more traditional forms of funding and need to get a merchant cash advance with bad credit.In general, merchant cash advance requirements are not complicated. But it’s important to talk to specific MCA providers to find out what’s needed for your small business to begin to receive advances. Not all merchant cash advance companies are alike. Some offer higher limits than others; some are more open to companies with bad credit than others; and so forth.Private merchant cash advance companies generally have less regulatory requirements than SBA loan lenders. It’s typically a good idea to check out an MCA company you’re considering with your local Better Business Bureau® to see how it rates and whether there are any complaints against it.

Pros and Cons of Merchant Cash Advances

As with just about any kind of small business funding, there are pros and cons to this option. Here are some of the most significant:

Pros of MCAs

Advantages of this kind of funding may include:
  • Speedy process from approval to the receipt of funds
  • Uncomplicated paperwork (perhaps just a basic application and a record of recent credit card/debit card transactions)
  • Payment amounts may drop if the amount of sales transactions dips
  • Lack of credit history isn’t typically an obstacle
  • Freedom to use the funds as desired

Cons of MCAs

Disadvantages of this type of funding can include:
  • High cost, with factor rates typically translating into 20% to 50% of the cash advance amount
  • Fees, which can be significant
  • No early repayment benefits
  • Could create debt cycles that can be difficult to escape
  • Automatic payments can complicate cash flow

The Takeaway

Merchant cash advances aren’t the right solution (or even possible) for every business in every given situation. When your small business needs funding, It may help to prepare by knowing how to apply for a small business loan.If you need small business funding, Lantern by SoFi can help. Just fill out a simple form and find the right financing for your business.Lantern can help you find fast funding for your small or medium-sized enterprise.

About the Author

Kelly Boyer Sagert

Kelly Boyer Sagert

Kelly Boyer Sagert is an Emmy Award-nominated writer with decades of professional writing experience. As she was getting her writing career off the ground, she spent several years working at a savings and loan institution, working in the following departments: savings, loans, IRAs, and auditing. She has published thousands of pieces online and in print.
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