Home Jersey finance news Maryland Bill would ban merchant cash advances | Manatt, Phelps & Phillips, LLP

Maryland Bill would ban merchant cash advances | Manatt, Phelps & Phillips, LLP


On February 3, 2020, Maryland State Senator Benjamin Kramer introduced a bill that would completely ban merchant cash advances (MCAs) in Maryland.

What happened

MCAs are a form of small business financing in which a finance company buys a portion of a business’s future earnings at a discount. In a typical MCA transaction, the business agrees to return to the finance company a specified percentage of a defined future revenue stream (such as revenue from credit card payments for the company’s products and services). company) until the total amount purchased has been delivered.

The structure of these transactions offers significant advantages to both buyer and seller. Buyers often prefer MCAs over loans because there are no set payment requirements, such as a minimum monthly payment amount. This aligns the funding obligation with the cash flow of the business and eliminates the risk that the business may not be able to make the required payments during a downturn in business. Also, if a business goes bankrupt, the business and its owner(s) owe nothing to the finance company, because a business that sells future earnings is only required to give the buyer a share of its earnings. only if these revenues are actually generated.

MCAs are an attractive product for finance companies because they are less regulated than loans. For example, MCA companies are not currently required to obtain lending licenses to engage in the activity, and disclosure and other requirements applicable to lending do not apply.

Despite the significant benefits they offer to merchants, MCAs are coming under increasing scrutiny due to the high prices charged by some MCA vendors and the use by a small number of vendors of practices controversial, such as the authorization of execution by means of an admission of judgment. California recently enacted SB 1235, which will require consumer-type disclosures about certain commercial financial transactions, including ACMs, although it will not take effect until the California Department of Business Oversight (DBO) will not have adopted regulations specifying the time, manner and format of disclosures. The Federal Trade Commission and DBO have also made MCAs a focus of enforcement efforts.

The Maryland bill comes as a bit of a shock to the industry, as it would ban ACMs altogether rather than seek to regulate them through licensing or disclosure requirements. While we doubt the bill will pass into law in its current form, some form of MCA regulation seems inevitable in Maryland.

why is it important

The Maryland bill confirms that lawmakers and regulators are concerned nationwide about MCAs and will continue to seek greater regulation of the product and also of small business lending in general. Other states may well follow suit in seeking to regulate ACMs, or even ban them.

Efforts are underway to educate lawmakers and regulators about this product, which is widely misunderstood and often unfairly attacked as a “small business payday loan.” While we believe the product is likely to survive legislative challenge, the scrutiny underscores the importance of properly structuring and documenting transactions as well as ensuring company policies and procedures follow best practices. . Now is the time to review the compliance of these products.