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How the new Disclosure Law can protect you against predatory MCAs

On Behalf of | Jul 5, 2024 | Merchant Cash Advances

Running a business in New York is a high-risk, high-reward project. Some risks, like taking out a Merchant Cash Advance (MCA), can seem like one worth taking. It is a particularly appealing option if your business does not have a great credit history or qualify for conventional loans.

However, MCAs can be predatory, especially if they have:

  • Excessively high factor rates
  • Very short repayment terms
  • Hidden or vague origination and processing fees
  • Aggressive sales tactics

So, why do some small businesses still take out an MCA? That’s because lending companies do not often reveal this information at the beginning. This is where the new Commercial Finance Disclosure Law (CFDL) comes in.

What is the CFDL?

The CFDL makes sure that lenders give small businesses clear and consistent information about the loans they are applying for. It does this by providing:

  • Clear definitions and calculations: The regulation gives definitions for all the terms used in these loans. Lenders are also instructed on how to calculate finance charges and the annual percentage rate (APR). This can help you better assess how an MCA can impact your cash flow.
  • No room for vague contract terms: The CFDL specifies how lenders should format loan disclosures, as well as the requirements for various types of financing. This clarity can help you compare different offers.
  • Accountability for financers and brokers: The law outlines responsibilities for lenders and brokers in commercial financing. It also requires certain providers to report the APRs of completed transactions to the Superintendent, which will help them calculate accurate rates for future transactions.

However, there are some downsides. The CFDL only applies to loans up to $2,500,000. The extra paperwork and disclosures might also feel overwhelming for some, especially if they prefer the quick and easy processing that comes with MCAs.

What if I already took out an MCA for my business?

If you didn’t receive clear disclosures when you first got your MCA, you can ask for it now under the CFDL. Knowing the details will help you handle repayments better and avoid unexpected surprises. And if your provider refuses, don’t worry – you can explore legal options to protect yourself and your business.