A small business owner, facing financial difficulties and unable to get a loan from a traditional financial institution, turns to one of the countless solicitations they’ve been receiving from a different kind of lender. Desperate to acquire short-term cash flow, they agree to a deal with a predatory lender that includes harsh terms. Either weekly or monthly, they owe sizable payments that make it almost impossible to extract themselves from the financial quicksand they’re now mired in.
It sounds like one of the storylines from an episode of “The Sopranos,” but it’s actually a very real, quasi-legal problem. Small business owners, particularly ones that depend on imports affected by tariffs, may find it impossible to resist the deluge of offers they’re receiving.
Seizing on the vulnerability of small importers and those requiring components with origination sites outside of the U.S., an aggressive alternative to traditional lenders has emerged over the past few years. Merchant cash advance (MCA) companies offer business financing for companies unable to secure loans from banks or credit unions, but with repayment terms that could be considered usury.
Targeting small businesses reeling from tariffs and other financial headwinds, MCA lenders flood messaging apps with offers of the money they need in hours, not weeks. While the immediate debt relief is welcome, the restrictive terms and subsequent lofty payments demanded by their new service providers can make paying off the borrowed amount difficult, if not impossible.
Are the financial services offered by MCA lenders a scam preying on those with nowhere else to turn, or the evolution of underwriting large lump sums of money to overextended businesses with shaky credit scores? For companies borrowing from Peter to pay Paul, it likely feels like the former.
The Vig, the Cut, the Juice, the Take
Small businesses that require items made in other countries have perhaps faced the most challenges in the past year. Tariffs are, in essence, a tax that the importing company must pay to take possession at the port of entry. When the tariff rate is low, companies may be able to absorb the cost without passing it along to their customers. Now, average tariffs have risen to the highest levels in decades, with some categories facing tariffs well above 100%. With sourcing within the country often too expensive or unavailable, small businesses are forced to pay an exorbitant dollar amount to claim their items.
While most small businesses would like to get a traditional business loan with a reasonable interest rate, that’s not always an option. The number of banks has decreased by nearly 66% over the past 45 years, and those still operating turn down close to two-thirds of small-business loan applications. Once owners have exhausted their credit cards, lines of credit, and personal guarantees, their options are severely limited. That’s where the MCA lenders come in.
Oh, the Shark, Babe, Has Such Teeth, Dear
MCA lenders come in a wide range of sizes and types of backing. Big companies such as Amazon and PayPal offer MCA services, as do firms backed by wealthy families and Wall Street investors. Others are less transparent about the source of their funding. One thing they have in common is turning an upfront infusion of cash into a lucrative, long-term source of income.
MCAs offer immediate financial relief at the cost of repaying the borrowed amount many times over. Instead of a traditional interest rate, MCA providers usually charge a factor rate, often in the 1.1–1.5 range, which can translate into effective annual costs that reach 40%–90% or more, and in some cases well above 100% once fees and short repayment periods are considered. Unless regulated by state law, MCA firms do not require a license to operate and have no fee cap on the services they charge.
An organized crime loan shark may have to worry about extracting payments from their clients. MCAs often bypass that complication by acquiring rights to future receivables. Each week (or even each day), an agreed-upon percentage of income from sales transactions is sent to the MCA firm, taken directly from the business’s bank account. For companies caught in a sales slump, this can lead to taking on additional MCAs to keep up with the first one. This is rarely a recipe for success.
The terms of some MCAs can make a loan shark seem compassionate. How can loans like this be legal?
I Am Not Bound To Please Thee With My Answers
There’s a simple reason why MCA loans aren’t subject to certain federal laws: they’re not structured as loans. MCAs are cash advances structured as purchases of future receivables. This is similar to a payday “loan” that is legally framed as a fee‑based advance rather than interest‑bearing credit. That structure allows MCA firms to sidestep many regulations that apply to term loans, including some usury limits and federal lending‑law protections.
The Consumer Financial Protection Bureau (CFPB) attempted to impose requirements on MCA lenders in 2023. Although a 2023 CFPB rule initially treated MCAs as a form of credit for reporting purposes, the Bureau later proposed excluding them, leaving many MCA practices outside federal reporting rules.
Companies in danger of collapsing under the financial burden of their MCAs previously had the option to try to refinance their debts through the Small Business Administration (SBA). However, SBA rules now bar using SBA 7(a) or 504 loans to refinance MCA debt. Protections against misrepresentation by MCA firms are available in some states, such as New York and California. It remains to be seen if the attorneys general in other jurisdictions will follow suit. Meanwhile, reading the fine print and fully understanding all terms and obligations on any MCA offer is essential.
Related Resources
- Tariffs Under U.S. Code (FindLaw’s Federal Codes)
- What Is the Consumer Financial Protection Board? (FindLaw’s Consumer Protection Law)
- Securing a Loan for Your Small Business: A Guide (FindLaw’s Small Business Law)
