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Is a Merchant Cash Advance Really a Loan?

The short answer: no, a merchant cash advance is not technically considered a loan. But, many legal and financial experts argue that in reality – it functions very much like one.

What is a Merchant Cash Advance?

A merchant cash advance, or MCA, provides upfront cash for businesses in exchange for a percentage of future credit card sales or revenues. It’s not a loan in the traditional sense, because with a loan – you’d pay back a set amount of money, plus interest and fees, over a pre-determined time period.

With an MCA though, the funder purchases a slice of your future receivables at a discount. So if you take a $100,000 advance, you may have to repay $130,000 or more from your future sales over time until it’s fully paid.

How Does MCA Repayment Work?

The repayment structure is where MCA’s start behaving loan-like. With a merchant cash advance:

– Repayment is automated through daily or weekly deductions from your bank account or credit card sales
– The deduction amount fluctuates based on your sales volumes
– There’s no final payoff date – you keep paying that set percentage until the advance, plus fees, is repaid

Sound familiar? It’s essentially paying down a balance through regular installments, like you would with a loan.

So Is It Really a Loan or Not?

Legally speaking, an MCA is considered a commercial transaction – not a loan. The money is an upfront purchase of future revenues by the funder.

But in practice, from the merchant’s standpoint – it sure walks and talks like a loan:

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– You receive a lump sum upfront
– You pay it back over time in incremental debits
– With added fees and charges tacked on

Why the Distinction Matters

This loan vs. not-a-loan debate isn’t just semantics. Because MCA’s are not technically loans, they aren’t subject to the same regulations as loans – like truth-in-lending disclosure requirements or usury laws that cap interest rates.

Merchants need to be crystal clear on this before signing: you could end up paying an effective annualized rate over 100% with an MCA depending on fees and your payback period. With loans, that’d be illegal.

If you approach an MCA with loan-like expectations of affordable payments over time, you could get blindsided by the true costs. It’s critical to understand the MCA’s terms and pricing structure upfront.

The Alternative View – Why an MCA Isn’t a Loan

MCA providers argue there are key distinctions making it not equivalent to a loan:

– It’s not directly based on your creditworthiness – the advance amount depends on your future revenue projections
– There’s no set interest rate or absolute payback amount – what you pay stems from taking a slice of your revenues
– There’s more flexibility if your sales dip – debits adjust to lower revenue levels
– It’s a commercial transaction with fewer regulations to allow quick access to funds

The Risks of Disguised Loans

Of course, if MCA providers intentionally structure the transaction to mimic loans while avoiding regulations – that’s a legal problem.

Some state governments have begun cracking down on potentially “disguised loans” with effective sky-high interest rates. Merchants need to know exactly what they’re getting into, so they don’t get trapped in cycles of crippling debt.

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Protecting Yourself with an MCA

Whether you view a merchant cash advance as legitimately distinct from loans or simply a loan in disguise – you absolutely must scrutinize the terms:

– Understand the fees and estimated total payback amount, not just the stated rate
– Review holdback percentages and how payback amounts flex with your sales volumes
– Know what happens if you can’t pay – are there default fees, personal guarantees, confessions of judgment, etc.?
– Compare your options – is this the best source of funds vs. lower-cost alternatives?

To be clear, MCAs are not inherently bad. But you must do your homework to avoid ending up with a product that traps you in debt because you didn’t understand the true costs.

At the end of the day, know this: While an MCA may technically not be a loan under the letter of the law, if it walks like a duck and talks like a duck – you better assess it accordingly to protect your business.

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$500,000 MCA Restructured Over 3 Years
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