Merchant cash advance is a financial option that’s growing in popularity among UK business owners for its accessibility and speed. But what exactly is an MCA, and more importantly, is a merchant cash advance legal in the UK?
What is a merchant cash advance?
At its core, an MCA offers businesses upfront cash in exchange for a percentage of future sales. Unlike a traditional loan, it’s not repaid through fixed monthly payments but rather through a flexible, ongoing deduction from daily sales, typically credit or debit card transactions.
This arrangement makes MCAs appealing to business owners with fluctuating revenue, like restaurants, salons, retail shops and seasonal businesses, who are common users.
Is Merchant Cash Advance Legal in the UK?
Yes, merchant cash advances are legal in the UK. But they operate differently from traditional loans and don’t fall under Financial Conduct Authority (FCA) regulation. Instead, they’re governed by commercial contract law.
Why is it important to discuss the legal issues related to merchant cash advances? The answer is straightforward: MCAs are not regulated as loans. This means business owners do not benefit from the same consumer protections that loans receive under FCA governance. As a result, providers have greater freedom in how they structure their terms. At the same time, it is increasingly important for businesses to carefully review agreements to protect themselves from MCA scams or exploitative contracts.
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MCA legal considerations
| Regulation | Key Points |
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Contract law |
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Consumer protection laws |
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Data protection & privacy (GDPR) |
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Anti-money laundering regulations |
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Merchant cash advances don’t fall directly under FCA lending rules, but that doesn’t mean they are completely unregulated. In the UK, several other laws and frameworks still influence how MCA agreements operate. These are:
1. Contract law
An MCA agreement is, at its base, a contract. This means both parties are legally bound to follow certain regulations. Providers have a responsibility to make their contracts fair, transparent, and not misleading. If an agreement contains hidden charges, unclear repayment terms, or exaggerated claims in the marketing material, it is challengeable under UK contract law.
2. Consumer protection laws
MCA providers are not bound by the FCA, but that doesn’t mean they can act without regulation. Broader consumer protection laws can still apply if a provider behaves unfairly towards a customer. These protections are not as strong as those for regulated loans, but they still give businesses a way to challenge poor practices.
3. Data protection and privacy
During the application process for an MCA, the business hands over sensitive business and financial data like bank statements, sales history, and sometimes even personal details. Providers must handle this responsibly under GDPR rules. That includes keeping data secure and only using it for the intended purpose.
4. Anti-money laundering regulations
Even though MCAs aren’t classified as loans, MCA providers must still comply with anti-money laundering regulations. This means they are required to carry out due diligence and deal with legitimate businesses only. These checks might feel like extra paperwork, but they help prevent fraud and protect both sides of the transaction.
Potential risks of merchant cash advances
MCAs offer fast cash, temporarily stabilise cash flow, and support flexible repayments, but they come with their own risks.
1. Higher accumulated MCA costs
MCAs differ from traditional loans not only because they have less strict credit score requirements but also in other key aspects. One major difference is cost. MCAs often carry much higher effective interest rates than standard loans, though this may not be obvious at first when businesses make weekly or monthly payments. However, once the costs are calculated as an APR, it becomes clear that fees can amount to an annual rate of 40%-50%. Paying such high interest can quickly deplete profits. While these higher rates reflect the lender’s risk, the contrast with the 5%-10% annual rates typical of bank loans makes the cost difference vast.
2. Strain on cash flow from consistent payments
MCA repayments are usually tied to daily or weekly sales, which can increase financial pressure. Payments must be made consistently, and because they are calculated as a fixed percentage, the business owes the same share even when sales are lower.
3. Lack of consumer protection
As we have discussed before, MCAs fall outside FCA regulation. This has both advantages and drawbacks for businesses. On the positive side, it allows them to avoid strict credit score checks and lengthy application processes. However, the downside is reduced consumer protection. If issues arise, businesses may not have the same options available to them as they would with traditional loans.
4. Complex MCA contract terms
MCA contracts are often detailed and complex, sometimes containing unexpected clauses. For example, a contract may include hidden fees or penalties for early repayment. Businesses do not usually anticipate these terms, so they can come as a surprise. This is why businesses must review contracts carefully and understand the terms before signing.
When should you choose a merchant cash advance?
MCAs aren’t for all businesses, but they can be useful in various circumstances.
1. For short-term cash flow needs
When a business faces an urgent cash gap, speed matters more than anything else. This is also one of the biggest advantages of MCA: that it is designed to move quickly. In fact, many providers can process the application and release funds within just a few days, and in some cases, even on the same day.
2. To capitalise on immediate growth opportunities
Business opportunities do not come with advance notice, and not acting in the moment can mean missing out altogether. For example, a supplier might offer a bulk discount that could cut production costs. Traditional financial solutions like bank loans are too slow for these moments, but an MCA can deliver funds quickly enough to let you act.
3. When traditional financing isn’t an option
Qualifying for a bank loan is not achievable for all businesses, especially startups or companies that have a short trading history. Merchant cash advances offer an alternative because they are based on future sales rather than past credit or assets. This means even businesses with bad credit may still be able to access funding. While MCAs can be more expensive than conventional loans, they provide a lifeline for businesses that might otherwise have no access to the cash they need to operate or grow.
4. When flexibility in repayment is required
MCA repayments are linked to the business’s sales. For seasonal businesses with fluctuating sales, this can make a huge difference. During slower periods, repayments naturally decrease, so cash flow can be reserved. This allows businesses to focus on operations rather than constantly worrying about meeting rigid payment schedules.
If you want to explore options that are both flexible and fully legal, it helps to connect with lenders you can trust.
Get Connected With Legal & reputable MCA Lenders With ComparedBusiness UK
ComparedBusiness UK can help you secure merchant cash advance funding from lenders in the UK that follow the legal considerations. Just submit your requirements in less than 2 minutes, and we will match you with them. You can pick and choose the best option as per your business requirements.
FAQs
Yes, MCAs are legal in the UK. They are not regulated by the FCA like traditional loans but are governed by commercial contract law and other frameworks such as consumer protection, GDPR, and anti-money laundering regulations.
MCA Risks include higher accumulated costs, strain on cash flow due to consistent percentage-based payments, reduced consumer protection, and complex contract terms that may contain unexpected fees and penalties.
MCAs are useful for short-term cash flow needs, completing immediate growth opportunities, when traditional financing isn’t available, or when repayment flexibility is required, such as for seasonal businesses.
