The merchant cash advance industry has more than its share of shady characters.
Outrageous premiums and aggressive recruitment tactics have justifiably cast a shadow over the entire industry and caused many business leaders to question whether merchant cash advances are a legitimate option for small businesses.
Since merchant cash advance companies aren't subject to federal laws like the Truth in Lending Act, the Electronic Funds Transfer Act, and the Fair Debt Collection Practices Act, it's up to the industry to police itself. There are merchant cash advance companies who are committed to operating within ethical and legal boundaries, but it's clear that merchant cash advance companies need to be evaluated on a case-by-case basis.
With cash advances reaching as much as $10 billion a year nationwide, the trick is finding a merchant cash advance provider who lives up to accepted industry standards and has a reputation for dealing fairly with their clients. Here is a sampling of the things you can do to protect yourself the next time you need a merchant cash advance provider.
- Verify merchant cash advance provider credentials. Cash advance brokers are known for exploiting business owners. A quick Internet search of merchant cash advance companies will yield a long list of names – most of whom are brokers, not the providers themselves. Brokers add extra costs to the process and have a questionable reputation in the cash advance community. Verify that you're working directly with a provider rather than a broker.
- Look for merchant cash advance hidden fees & conditions. Unscrupulous merchant cash advance providers and brokers thrive on hidden fees and other conditions that are designed to take advantage of unknowing business owners. In addition to closing fees, some companies require business owners to switch credit card processing companies and lease new equipment at a higher rate than their current credit card setup.
- Check with the Better Business Bureau. Even though merchant cash advance companies and brokers aren't subject to federal lending laws, the Better Business Bureau (BBB) and the Federal Trade Commission (FTC) regularly receive and report complaints about companies that are doing business on the ragged edge of the law. Check with the BBB, the FTC, and other business associations for red flags and complaints against your cash advance provider.
- Get a contract. The contract you sign with your merchant cash advance company is your best protection against dodgy business practices. Request a copy of the merchant cash advance contract ahead of time and vet it to make sure it doesn't contain any surprises.