By Dale S. Laszig
Nonbank finance has evolved over the past decade, but experts say lawmakers don't yet understand its nuances. Industry leaders are rallying stakeholders to join them in educating Washington while promoting best practices from within. Their syllabus highlights the differences between merchant cash advances (MCAs) and loans, and consumer and business finance models. Self-regulatory approaches have centered on disclosure, transparency and industry best practices.
In a panel discussion at Broker Fair 2019, an annual conference hosted by deBanked, Jeremy Brown, chairman at Rapid Finance and vice president of the Small Business Finance Association, encouraged lenders to communicate with regulators, join trade associations and advocate for favorable treatment. Legislators frequently equate cash advances with loans, where borrowers pay X percent or points and X goes to the broker, he stated. This skews discussions about how much merchants pay for cash advances and what constitutes a fair price.
Fellow panelist Mark Ruddock, CEO of BFS Capital, agreed, urging the audience to participate in government and private sector discussions. "If you lead [discussions], you have some degree of control over the narrative and can end up with a win-win for both sides," he said. "It's in our interests to take a proactive stand and engage with legislators about these issues."
Adam Atlas, attorney at law, observed some states require lenders to be licensed, particularly consumer lenders. "If you're new to the industry, there's enormous work to be done to create appropriate disclosure," he said. "Truth in Lending, known in the trade as TILA, requires honest disclosure. Misleading business lending can get you in as much trouble as consumer lending."
Trade publications, regional and national conferences, and not-for-profit associations reflect the nonbank finance industry's expansion and maturity. Nonbank finance professionals have access to numerous resources, including:
Atlas recalled that years ago, when Advance Me had patented cash advance funding, his law firm worked with the National Merchants Advance Association, which later became the SBFA. "The association successfully challenged the patent, and it was nice to see there would not be a monopoly player in the space," he said.
An MCA is always in a business context, Atlas said, adding that eligible businesses have receivables coming in on a regular basis. He offered an example of how MCA works: An MCA provider advances $5,000 to a business owner in return for $5,500 of future receivables. The merchant promises to pay that $5,500 by sending a fixed percentage of future receivables (40 percent) at agreed-upon intervals until the full amount is paid.
If the merchant receives $1,000, $400 goes to the MCA provider toward the $5,500, with the remaining $600 kept by the merchant. If the merchant does well, the MCA is paid quickly. If the merchant does poorly, the MCA is paid slowly. If the merchant goes bankrupt and there are no more receivables, the MCA provider gets nothing. In this relationship, if a merchant honestly goes out of business, there is no recourse, Atlas noted.
"Technically speaking, if you were to construe a cash advance as a loan and calculate how much was provided and how much was paid, you might find the rate usurious," Atlas said. "But MCAs carry more risk. MCA providers hope to earn a healthy return on receivables, but they are not like lenders who can argue they must collect the full amount of a loan no matter what."
Atlas also observed that as MCA has matured, the playing field has leveled. In some cases, the cost of MCA capital approaches the cost of a loan, which means MCA providers and lenders are increasingly competing for the same merchants.
Katherine Fisher, partner at Hudson Cook LLP and founding member of the Alternative Finance Bar Association, works with a cross-section of nonbank finance companies. SMB owners use financing to make more money, she stated. They need transparent pricing disclosures to evaluate total cost of capital and benefits of different types of available financing.
Fisher has seen increased regulatory pressure on MCAs, particularly among brokers who sell MCAs while acting as settlement companies. Some act in bad faith. They "help" SMBs obtain financing, then encourage them to default and pay debt consolidation. This creates problems for legitimate brokers, she noted.
"The FTC is very interested in MCA," Fisher said. "By and large, the industry has good, compliant practices. Stakeholders need to implement formal policies and procedures to demonstrate what they are doing and how they comply with the law."
Fisher, also a compliance attorney, advises funders to get involved in government affairs and lobbying efforts. She believes that in five to 10 years, the industry will either self-regulate or the FTC will take action to help merchants understand their finance options. State legislators are considering MCA regulations, which may lead to broader oversight. Self-regulating all types of brokers is critical; if one side is regulated and not another, it won't promote uniform best practices, she added.
Murray said he's been hearing about self-regulation for years but questions the motives. Do funders see competitors touting transparency and don't want to be left out? Do they want to score points with the media? Improve their bottom line?
"If you're a bad actor and the media crucifies you, you can still say my bottom line is good," he said. "Ultimately, best practices should mean more than having a competitive advantage or garnering positive press."
Murray also warned against oversimplifying products. Stacking, the practice of layering multiple types of funding on a single merchant, has been a polarizing issue. Some funders believe anyone who stacks is wrong. Murray disagrees, saying there are positive ways to stack.
"Instead of layering three or four identical products, work in a way that makes sense for the customer, like a five-year line of credit, equipment lease and MCA," Murray advised. "Lenders win because customers with different products are lower risk, and the broker can still sell multiple products."
"Simplicity draws SMBs to SBFA members and their products," Denis said. "Our member companies show total payback and all the disclosure regulators like to see." Denis said the SBFA educates regulators in different states about how products work, spending significant time on the differences between consumer-designed products and commercial finance; funding and disclosures are underwritten differently and based on different needs.
"A consumer gets funding to fix a car or address an emergency," Denis said. "A business owner gets funding to make money. Even average business owners have produced cash flow, know what they're doing and frankly have better things to do than to read pages of disclosure."
Darren Schulman, president at 6th Avenue Capital, said proactivity is key to implementing best practices. "Don't wait until something happens," he said. "Constantly update business partners and clients and renegotiate if necessary. … We advise every merchant of their rights, which are spelled out on the contract. An advance is not a loan where there's a due date. If revenues are up or down, we adjust payments accordingly."
Chad Otar, CEO at Lending Valley Inc., said, "First, I explain if it's a loan or not a loan, then pricing and daily or weekly payback. I review fees line by line ‒ wire fee, origination fee. Then I try to find the customer's comfort zone to create an equitable repayment plan."
Otar believes in keeping it simple. "If I go to buy a car and the salesperson tells me stuff I don't want to hear, I say, let me take my time and do my evaluation," he said. "Meet me in the middle but know when to shut up. Overselling can deter me from doing business." 
Dale S. Laszig, senior staff writer at The Green Sheet and managing director at DSL Direct LLC, is a payments industry journalist and content development specialist. She can be reached at dale@dsldirectllc.com and on Twitter at @DSLdirect.
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