Addressing Misconceptions in the MCA Business

New to the MCA business? Think you got it figured out? Let’s visit some of the stranger beliefs and misconceptions I’ve encountered over the last year. (Not legal advice as I am not an attorney).

My broker/funding company’s legal address as recorded with the Secretary of State or courts is my personal information and no one is allowed to know it or share it on the internet.

False. The business address you place on file with governmental authorities or courts is generally available to the public. If you opt to use your home address as your business address, just know that it will be open to everyone to see and share. Additionally, starting Jan 1. 2024, any broker soliciting merchants that reside in Florida will have to take the additional measure of including their official business address in their marketing to the merchant. So no, you are not entitled to complete anonymity.

I can fund in all 50 states!

But can you though? If you offer loans, there are a number of state laws that govern the legality of that. If you offer MCAs, there are states like Virginia for which you are required to be registered by law (applies to both funders and brokers). There are penalties for not following the laws.

I don’t need any fancy systems to be a funder

Well you’re going to need something. In the not too distant future you will be required to comply with 888 pages of regulations governing how you can collect merchant data all while having to report the details of every single application you looked at in addition to every single deal you declined or funded to the federal government. You also have to explain the rationale for your decision in every instance. This includes MCA and yes it’s a law not a proposal. I hope you’re ready.

MCA is legal so I don’t need to worry about anything

There are legal precedents that guide what can or can’t be done with regards to the purchase of future receivables. Generally speaking (and please consult with an attorney), one’s right to collect is not absolute. See this recent case, for example.

I sent some deals out to some shady funders who have gone MIA and no longer take my calls. The funder is to blame and is bad

Most brokers who cry foul about no-name fly-by-night funders that offered swift approvals and high commissions only to be ghosted are quick to share that they were swindled out of a potential commission. No one likes to suffer through that. However, consider the legal risk now posed to yourself and your client with the information you’ve passed on. In a recent criminal case, an ISO managing merchant documents is alleged to have stolen their identities and obtained dozens of business loans in their names. So ask yourself on a scale of 1 – 10, how confident are you in the person/company you’re passing a merchant’s deal docs to that they will comply with all state and federal laws? Your commission might not be the only thing they steal and that creates legal hazard for you. For what it’s worth, he’s a good guy isn’t a great standard when it comes to legal due diligence.

As always, please consult a qualified attorney. If you are being solicited by a funder that has not sought any legal advice at all and is instead operating by the seat of their pants because they heard this was a good business, you should probably move on to someone else.

California On Verge of Passing Another Commercial Financing Bill

Complying with the recent California commercial financing disclosure law? Great! Get ready for another one. Senate Bill 666 (unfortunate number choice) has been making its way through the state legislature since February and is approaching a final vote.

The bill would prohibit covered entities from charging:

(a) A fee for accepting or processing a payment required by the terms of the commercial financing contract as an automated clearinghouse transfer debit, except for a fee imposed for a payment by an automated clearinghouse transfer that fails because of insufficient funds in the transferor’s account.

(b) A fee for providing a small business with documentation prepared by the covered entity that contains a statement of the amount due to satisfy the remaining amount owed, including, but not limited to, interest accrued to the date the statement is prepared and a means of calculating per diem interest accruing thereafter.

(c) A fee in addition to an origination fee that does not have a clear corresponding service provided for the fee, including, but not limited to, a risk assessment, due diligence, or platform fee.

(d) A fee for monitoring the small business’s collateral, unless the underlying commercial financing transaction is delinquent for more than 60 days.

(e) A fee for filing or terminating a lien filed in accordance with the provisions of the Uniform Commercial Code against the business’s assets that exceeds 150 percent of the cost of the filing or termination.

Overall, the bill is not that extreme. The bill can be viewed and tracked here.

When Your Competitors Do Wrong, Do Right

“…no matter what industry you’re in there’s always going to be bad apples, and you kind of have to see which way they’re coming from,” said Heather Francis, CEO at Elevate Funding.

Competition within this industry will always exist, fueling the drive of professionals in the field. But how can one compete with a competitor who is actively deceiving the merchant? Furthermore, how can one advise that client to exercise due diligence without appearing to display dishonest intentions? Transparency has become a rising issue separating those in the field for the right reasons from those who are not.

“Companies should be dedicated to conducting their business consistent with the highest standards of ethics and integrity,” said Laura M. Marolla, VP ISO Relations at World Business Lenders (WBL). “We have an obligation to our colleagues, customers, business partners and investors, as well as the communities in which we operate to be honest and forthright in all our business practices and interactions.”

Funding and lending companies working with customers should be forthright about everything, from the amount the customer will receive, the total cost, and what they should expect throughout the relationship. Also they should be consistent with the terminology used so that the customer doesn’t become confused.

Francis explained that terms like “fee” could be interpreted in several different ways. Her company has developed an entire blog dedicated to terminology to help merchants weed out jargon.

“Terminology is very very important because I could understand fee to mean one thing and you could understand it to be different,” said Francis. “And that’s not transparent if we’re speaking a different language, that can be misconstrued.”

Case in point, Francis’s company Elevate offers Revenue-based financing while Marolla at WBL offers loans. On this basis alone, each company’s product works very differently.

“Ongoing education for all staff should be required, during which responsible lending practices should be emphasized and ingrained into the culture of the organization,” said Marolla. “While in the end, each merchant must take responsibility for its business decisions, informed decisions by merchants can be facilitated through transparency in disclosures and responsible business practices throughout the lending process.”

And if a competitor is not being transparent or responsible, Francis said that there is a delicate way to communicate that to the customer.

“From our team, what we do if a merchant says, ‘hey, so and so promised me X, Y, and Z,’ if there are reviews out there that show the other company can’t deliver that, we will send them the link. ‘You can see what previous customers have said, and it seems like they haven’t always been true to their word.’ We can also give the client something to look out for.”

One particular thing she said can be a red flag is if a company tells the customer at the last minute that they’re going to get a lot less than what they originally contracted for, which they have seen happen. Elevate hopes that when a customer recognizes a warning sign that they will remember Elevate’s polite manner of advising them what to have looked out for in the first place.

Francis explained it’s about making them feel free to come back to them, that there’s no hard feelings if it looks like they got a better deal. “‘If you have any questions. If you don’t feel that the person is being truthful with you, we’re happy to answer any questions, or you can bounce ideas off of us,'” is the message they try to leave them with. “We’re just trying to have a relationship so that we can curtail someone who’s lying about what they’re doing.”

Pending Florida Law Draws From DailyFunder’s Rulebook

Florida’s impending disclosure law is not so unique after all. As one user pointed out, Florida’s plan to require that brokers disclose their actual address and phone number in any advertisement is actually a copy & paste of a rule on DailyFunder.

On October 24, 2015, for example, DailyFunder declared that any company soliciting business would have to disclose their physical address and phone number. The rule was stickied in the Promotions subforum and is the first thing shown to users visiting that area.

This phone number and address requirement did not appear in commercial financing disclosure laws passed by other states yet it reared its head in Florida’s bill, a state with a strong user base of DailyFunder users.

The bill is currently awaiting the signature of Governor DeSantis. If enacted, the DailyFunder rule as a legal statute would be the first of its kind.