[JustInCase]

MCA CONTRACTS MUST ALLOW FOR RECONCILIATION TO AVOID BEING CONSIDERED A USURIOUS LOAN
Merchant Cash Advance Companies provide working capital to small and midsize retailers and businesses, or merchants, through an alternative and specialized method of the purchase of future receivables.

The merchant cash advance company purchases receivables anticipated to be generated from a merchant’s future sales.

The merchant generally authorizes the merchant cash advance company to receive a certain percentage of its future daily receivables or a fixed daily amount, estimated to equal the percentage of repayment as contained in the Merchant Cash Advance Agreement.

Merchant Cash Advance contracts are most properly defined as the Purchase and Sale of Future Receivable Agreements. These MCA agreements will generally illustrate the total amount of future receivables purchased by the MCA company.

For example:

An MCA company purchases $50,000 worth of future receivables from a merchant.
The lender funds the merchant borrower with $37,500 for those receivables.
The lender places a required repayment schedule at the repayment rate of $368 per day upon the borrower for the $37,500 advance.
Then

This repayment rate is theoretically calculated upon the contractually agreed percentage of the merchant’s daily or weekly receivables.

The contractual key to these transactions preventing them from being considered “loans” is that the merchant does not unconditionally agree to “repay” the advances.

The merchant is only selling its future receivables to the extent those receivables are generated by the business. If the merchant does not actually generate sufficient receivables due to adverse business conditions, the merchant cash advance company should, in theory, suffer the loss.

The merchant’s obligation to deliver the future receivables is expressly conditioned upon the continuance of the merchant’s business.

Due to the conditional nature of the repayment obligation, a true merchant cash advance transaction is not considered a loan and, therefore, is not subject to the commercial usury laws and state licensing laws that apply to loans.

Common law generally recognizes that for an advance to be characterized as a loan, the advance must be unconditionally repayable. If the obligation to repay is conditional, then the transaction is generally considered to not be a loan.

In other words, so long as the merchant cash advance transaction does not require the merchant to “repay absolutely,” the transaction is most likely not to be considered a loan.

MCA agreements contain that necessary “conditional repayment” designation to avoid being considered illegal loans. To do so, those contracts must contain something referred to as a Reconciliation or Readjustment clause.

RECONCILIATION OR READJUSTMENT CLAUSES
A reconciliation, or readjustment clause, essentially states that if your daily or weekly revenues decline, then you have the right, or the MCA lender may even have the obligation, to adjust your daily or weekly payment downward to be more accurately tied to your current revenues based upon the daily or weekly repayment percentage as contained in that MCA contract.

If your revenue has gone down since the time you obtained the advance, once you notify your MCA lender of the decline in your receivables, the lender is contractually obligated to adjust your payment obligation downward.

The actual contractual language may state something like:

“There is no interest rate, payment schedule, or time period in which the purchased amount must be collected by Purchaser (MCA company). Seller, (merchant) going bankrupt or going out of business, in and of itself, does not constitute a breach of this agreement. Purchaser is entering into this agreement, knowing the risk that the seller’s business may slow down or fail.”

These clauses are also sometimes referred to as “true-up” or “look back” clauses.

These clauses extreme importance arises under the circumstances where the borrower (merchant) contacts his or her MCA company and tells the lender that their revenues have declined and requests a modification of the daily or weekly payments while the lender reviews the most current financial records of the merchant borrower to accurately formulate the new reduced payment schedule.

When a merchant borrower contacts his or her MCA lender to explain that their revenues are down from the time they obtained the advance, the MCA lender will state that they will consider adjusting the payment to a lesser weekly or daily payment amount.

What most often occurs is that the MCA lender does not actually request or review the borrower’s current financial revenue information to properly and accurately adjust the payment schedule. Instead, the lender may just cut the payment by 50% for two or three weeks only.

Another typical reconciliation or readjustment provision commonly found in the Purchase and Sale of Future Receivables Agreements is as follows:

“if purchaser [MCA lender] determines that purchaser received an amount greater or less than the purchased percentage of the seller’s future sale proceeds during the look back period, then purchaser may determine a remittance adjustment. Purchaser shall use reasonable business practices to determine the remittance adjustments so that purchaser is receiving the approximate purchase percentage of future sale proceeds.”

Because of this type of contractual language, theoretically permitting the fluctuation or the changing of the payment based upon a change in revenue, courts have consistently held that Merchant Cash Advances are NOT usurious loans.

AVOIDING USURY CLAIMS – MCA COMPANIES CREATE THE APPEARANCE OF CONDITIONALITY
In a Merchant Cash Advance transaction, payments to the lender are linked to and contingent upon the merchant’s business revenue. In a loan, there is an unconditional right to repayment regardless of the state of the recipient’s business or financial affairs.

To make certain the repayments are, or look, conditional, the MCA lenders must make certain that the merchant borrower does not unconditionally agree to “repay” the advances.

Here are the terms of the loan agreement that courts acknowledge as evidence of a purchase and sale of receivables rather than a loan:

-The merchant is only selling its future receivables to the extent they are available. So, if cash receivables decline due to adverse business conditions (loss of site, natural disasters, pandemic, or similar material adverse change), the merchant cash advance company suffers the loss.

-Bankruptcy is not considered a breach of contract or an element of default.

-The owner of the merchant business guarantees that the business will not breach any covenants in the merchant cash advance agreement, but the owner is not an unconditional guarantor of repayment.

-The merchant’s obligation to deliver the future receivables is conditioned upon the continuance of the merchant’s business.

[JustInCase]

MCA CONTRACTS MUST ALLOW FOR RECONCILIATION TO AVOID BEING CONSIDERED A USURIOUS LOAN
Merchant Cash Advance Companies provide working capital to small and midsize retailers and businesses, or merchants, through an alternative and specialized method of the purchase of future receivables.

The merchant cash advance company purchases receivables anticipated to be generated from a merchant’s future sales.

The merchant generally authorizes the merchant cash advance company to receive a certain percentage of its future daily receivables or a fixed daily amount, estimated to equal the percentage of repayment as contained in the Merchant Cash Advance Agreement.

Merchant Cash Advance contracts are most properly defined as the Purchase and Sale of Future Receivable Agreements. These MCA agreements will generally illustrate the total amount of future receivables purchased by the MCA company.

For example:

An MCA company purchases $50,000 worth of future receivables from a merchant.
The lender funds the merchant borrower with $37,500 for those receivables.
The lender places a required repayment schedule at the repayment rate of $368 per day upon the borrower for the $37,500 advance.
Then

This repayment rate is theoretically calculated upon the contractually agreed percentage of the merchant’s daily or weekly receivables.

The contractual key to these transactions preventing them from being considered “loans” is that the merchant does not unconditionally agree to “repay” the advances.

The merchant is only selling its future receivables to the extent those receivables are generated by the business. If the merchant does not actually generate sufficient receivables due to adverse business conditions, the merchant cash advance company should, in theory, suffer the loss.

The merchant’s obligation to deliver the future receivables is expressly conditioned upon the continuance of the merchant’s business.

Due to the conditional nature of the repayment obligation, a true merchant cash advance transaction is not considered a loan and, therefore, is not subject to the commercial usury laws and state licensing laws that apply to loans.

Common law generally recognizes that for an advance to be characterized as a loan, the advance must be unconditionally repayable. If the obligation to repay is conditional, then the transaction is generally considered to not be a loan.

In other words, so long as the merchant cash advance transaction does not require the merchant to “repay absolutely,” the transaction is most likely not to be considered a loan.

MCA agreements contain that necessary “conditional repayment” designation to avoid being considered illegal loans. To do so, those contracts must contain something referred to as a Reconciliation or Readjustment clause.

RECONCILIATION OR READJUSTMENT CLAUSES
A reconciliation, or readjustment clause, essentially states that if your daily or weekly revenues decline, then you have the right, or the MCA lender may even have the obligation, to adjust your daily or weekly payment downward to be more accurately tied to your current revenues based upon the daily or weekly repayment percentage as contained in that MCA contract.

If your revenue has gone down since the time you obtained the advance, once you notify your MCA lender of the decline in your receivables, the lender is contractually obligated to adjust your payment obligation downward.

The actual contractual language may state something like:

“There is no interest rate, payment schedule, or time period in which the purchased amount must be collected by Purchaser (MCA company). Seller, (merchant) going bankrupt or going out of business, in and of itself, does not constitute a breach of this agreement. Purchaser is entering into this agreement, knowing the risk that the seller’s business may slow down or fail.”

These clauses are also sometimes referred to as “true-up” or “look back” clauses.

These clauses extreme importance arises under the circumstances where the borrower (merchant) contacts his or her MCA company and tells the lender that their revenues have declined and requests a modification of the daily or weekly payments while the lender reviews the most current financial records of the merchant borrower to accurately formulate the new reduced payment schedule.

When a merchant borrower contacts his or her MCA lender to explain that their revenues are down from the time they obtained the advance, the MCA lender will state that they will consider adjusting the payment to a lesser weekly or daily payment amount.

What most often occurs is that the MCA lender does not actually request or review the borrower’s current financial revenue information to properly and accurately adjust the payment schedule. Instead, the lender may just cut the payment by 50% for two or three weeks only.

Another typical reconciliation or readjustment provision commonly found in the Purchase and Sale of Future Receivables Agreements is as follows:

“if purchaser [MCA lender] determines that purchaser received an amount greater or less than the purchased percentage of the seller’s future sale proceeds during the look back period, then purchaser may determine a remittance adjustment. Purchaser shall use reasonable business practices to determine the remittance adjustments so that purchaser is receiving the approximate purchase percentage of future sale proceeds.”

Because of this type of contractual language, theoretically permitting the fluctuation or the changing of the payment based upon a change in revenue, courts have consistently held that Merchant Cash Advances are NOT usurious loans.

AVOIDING USURY CLAIMS – MCA COMPANIES CREATE THE APPEARANCE OF CONDITIONALITY
In a Merchant Cash Advance transaction, payments to the lender are linked to and contingent upon the merchant’s business revenue. In a loan, there is an unconditional right to repayment regardless of the state of the recipient’s business or financial affairs.

To make certain the repayments are, or look, conditional, the MCA lenders must make certain that the merchant borrower does not unconditionally agree to “repay” the advances.

Here are the terms of the loan agreement that courts acknowledge as evidence of a purchase and sale of receivables rather than a loan:

-The merchant is only selling its future receivables to the extent they are available. So, if cash receivables decline due to adverse business conditions (loss of site, natural disasters, pandemic, or similar material adverse change), the merchant cash advance company suffers the loss.

-Bankruptcy is not considered a breach of contract or an element of default.

-The owner of the merchant business guarantees that the business will not breach any covenants in the merchant cash advance agreement, but the owner is not an unconditional guarantor of repayment.

-The merchant’s obligation to deliver the future receivables is conditioned upon the continuance of the merchant’s business.

This would work seamlessly in a perfect world. However, there are a few issues. With lenders they would have to stop being so payment thirtsy. But that cannot happen because their investors, partners are promised short-term returns so the money can never stop moving or their funding capabilities seize. Also, lenders would need to decline more deals when they see a stacker as a stacker stacks and the future numbers are basically resold multiple times in some cases 12-13X. So that is where brokers come in they would have to stop stacking which will not happen as that is how they make a living. True reconciliation is impossible with a lot of these merchants cause they are caught in the cycle of paying off MCAs with other MCAs. Lenders should do stacking checks regularly like a reverse. UCCs are a good tool if used properly and all deals should be required to show AR or they are dead from a lenders risk analysis. There would be less defaults. Both sides need to make sacrifices but in the world of MCA never until the trash is regulated out like all unregulated markets. MCA will never die but many of its players will by not adopting better business practices. Most MCA agreements contain stacking rules and to stack is to breach contract as a merchant. To stack is to breach contract as a broker. Lenders need to enforce those rules vs go with the fast money funding. Brokers who stack aggressively are not trusted partners they are detrimental putting their lending partners funds at risk. That is NOT a partnership, that is a vehicle to operate.