OPINION: Nanny State Targets Merchant Cash Advance Industry


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The most powerful force in the universe is the force of the status quo. And in every era, there have been institutions standing firm to hold back the forces of change.  

In early 16th-century Europe, as market forces were loosening the constraining shackles of feudalism, the Catholic Church tried mightily to hold back that tide by declaring any interest rate to be unlawful usury. The effort failed, and Europe enjoyed an economic boom that carried over to the New World.

In colonial America, Great Britain’s imposition of taxes on everything from tea to paper was a major factor in the Revolutionary War that stripped the Empire of one of its most important colonies. Our Founding Fathers recognized the importance of keeping markets as free as possible from the unwelcome hands of government, and our Constitution places explicit limits on government’s power to control property, private contracts and other market forces.  

Yet time and again since then, presidents, Congresses and state governments have moved to limit entrepreneurial forces that threaten the status quo.

In recent years, this regulatory strategy has included measures designed to make it increasingly difficult for businesses to provided funds to individuals and small businesses in need of quick cash, but who have neither the credit history nor the collateral to qualify for traditional loans from banks. We have thus seen ever-tightening regulations of pawnbrokers, title-lenders and payday loan companies. Regulators have not yet killed such industries, but not for lack of trying.

This is the environment in which a relatively new, but growing business model — the merchant cash advance (“MCA”) — finds itself.  Such agreements provide a much-needed safety valve for many small businesses struggling to stay afloat in a sea of conglomerates and multi-billion-dollar tech giants like Amazon.

It is vital that this industry not fall victim to regulators and legislators who, in their often-well-intentioned zeal to protect against so-called “predatory lending,” close off avenues that provide essential assistance to help entrepreneurs and businesses survive.

The merchant cash advance concept is simple. A small company in need of quick cash receives it from an MCA, and in return, agrees to turn over to the MCA a specified portion of its future sales or accounts receivable. The arrangement does not fall within the legal definition of a “loan,” so there is no “APR” or Annual Percentage Rate of interest that subjects the MCA to the myriad limiting regulations surrounding such instruments.

And this where Nanny State regulators (led, not surprisingly, by those in California) enter stage left. They fret that the accounts receivables or future sales that the MCA obtains as the price for assuming the risk, may exceed what the law allows as a reasonable rate of return for a loan. Despite this calculation being based on mixing apples and oranges, legislators on the Left Coast now are looking to “rein in” MCAs.

As noted in an article by Steve Sherman just last month in Townhall.com, regulatory efforts in California to control merchant cash advance companies by treating them as traditional lenders, “makes no sense and imposes unnecessary costs.”  

In Sherman’s apt analysis, such a move would severely endanger this industry just when it is maturing and meeting the needs of more and more small businesses. He also notes that private sector players, such as the Consumer Finance Coalition, are working actively to establish best practice standards for MCAs, as a far better way to police the industry than the heavy-handed regulatory approach favored by government.

Nationally, tax relief and regulatory reform measured by the Trump administration have dramatically reduced unemployment and led to sustained growth in our GDP. Objective observers understand that small businesses largely fuel that growth, and they know that access to capital is essential for small businesses not just to thrive, but to survive.

While corporate giants like Amazon or Home Depot may never need a merchant cash advance, many small businesses absolutely need such tools to get them over the dips and valleys they inevitably encounter. Similarly, while a Michael Bloomberg or a Mark Zuckerberg will never need a payday loan to survive a health emergency in their family, many individuals in the real world will find themselves in just such a predicament.

The bottom line is that government regulators must not be permitted to unnecessarily limit, and possibly kill options like merchant cash advances; especially now, when small businesses are driving much of the economic success birthed by the Trump Administration’s tax and regulatory policies.

Bob Barr represented Georgia’s Seventh District in the U.S. House of Representatives from 1995 to 2003. He provides regular commentary to Daily Caller readers.

The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.