The New ACH Age
Using ACH transactions to take money out of the merchants’ bank account changed the game. Now, the merchant’s processor did not have to be involved. The merchant gives its consent to the cash advance company to periodically take cash from the merchant’s bank account. So, if you were a purist, the cash advance company would on a daily basis look at the merchant’s credit card receipts and deduct the correct amount based on the applicable percentage from the merchants’ bank account. It was a little more risky in that the merchant could change the bank account but that risk is seen by many to be reasonable.
But how often to take money out of the bank account and how much became an issue. It is very labor intensive to look at a merchant’s processing every day so some started to do weekly or less frequent withdrawals. But that still is a lot of effort. So some people decided that they would estimate the amount that should be taken out weekly or daily and then just automatically take out that amount of cash from the merchant’s bank account. But that meant to actually take out the stated percentage, there had to be a true up on a monthly basis. By that I mean the actual amount collected based on the estimates had to be compared with what should have been taken out based on the percentage of the merchants processing that should have been collected.
However, I found that some people just took out the estimated amount only and did not true up. But if you were doing that for credit card processing, why not do it for all the merchants’ revenue? That way, you would be able to provide larger advances to merchants. You would also be able to provide cash advances to merchants that collected little if any revenue by credit card. In effect, the ACH method increased the number of merchants that can get a cash advance.
But all this still leaves open the question of those lawsuits. The further you go away from the pure cash advance the more likely some lawyer is going to argue it is just a disguised loan. So on one end of the spectrum if you provide a cash advance with a simple agreement, split funding only credit card processing proceeds, provide for no personal guarantee, record no security interest and largely keep away from suing merchants, arguably you will decrease the risk of getting sued. But if you ACH money from the merchant with no direct relationship to the processing volumes, require a personal guarantee and file a security interest and aggressively sue merchants’ that default, you might find yourself more likely to get sued for usury. It is just a matter of your appetite for risk as to where you want to end up on that spectrum. DF
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* Paul A. Rianda, Esq. is an attorney who has specialized in providing legal advice to the cash advance and bankcard industries for over 15 years. For more information about this article or any other matters, please contact Mr. Rianda at (949) 261-7700 or via email at paul@riandalaw.com
** The information contained herein is for informational purposes only and should not be relied upon in reaching a conclusion in a particular area. The legal principles discussed herein were accurate at the time this article was authored but are subject to change. Please consult an attorney before making a decision using only the information provided in this article.
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