Loan or Cash Advance – That is the Question
My home county is ground zero for an attack on the cash advance industry. In the federal courthouse in Santa Ana, California a number of lawsuits have been filed against cash advance providers alleging that the cash advances they are making a really loans at interest rates that amount to usery. But is that really the case and what can cash advance providers do to combat such lawsuits?
The question about loans versus cash advance has been around for some time. I have gotten many calls asking me about this issue. People like analyst and investment bankers have called me asking about how cash advances work and how they are documented. These people are interested n the great rate of return in the industry and wonder how the returns can be so high woulthout there being some type of risk.
The risk has been minimal unrtil recently so I don’t think that cash advance companies were as prepared as they could have been. By that I mean the look and fell to me of most cash advance agreements looked more like a loan than a cash advance. The agreemetns were very long for the most part, very complicated and called for a personal guarantee. The agreements had some many excpetions that allowed the cash advance company to go after the principals of the merchant that alsmost any default allowed them to do so. I think tis contributed to the issues that we see today. So how to compbat this problem?
The main way I see is to simplify the agreements to show that they are really a true purchase of the future credit card receivables of a merchant, not a disguished loan. So the agreement has to clearly state that if the merchant goes out of business for most reasons, the cash advance provider will not have recourse against the principals.
The information contained herein is for informational purposes only and should not be relied upon in reaching a conclusion in a particular area. The legal principles discussed herein were accurate at the time this article was authored but are subject to change. Please consult an attorney before making a decision using only the information provided in this article.