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Policymakers Targeting MCAs as Small Business Continue to Suffer Skyrocketing Interest Rates

As micro-business loan interest rates skyrocket, access to business financing is increasingly limited for small companies— the sector that runs a large portion of the US economy. But a set of policymakers and protestors plan to limit access even more under the pretext of consumer protection.

Interest rates hitting the roof means that the rates at which one bank lends reserve balances to another are increasing, raising the prices (for small companies) for obtaining businesses financing via bank-issued traditional loans. With the exponential rise in costs, consumers will be left with even fewer dollars to settle exorbitantly higher interest rates on their lines of credit.

Industry specialists and economists had forecasted this storm last summer—many warned that shooting interest rates would limit capital access for small businesses soon.

“Businesses are looking to borrow cash for expansion campaigns incur a greater cost of capital when loan interest rates rise. This includes companies that are already in debt because many small business loan products feature floating and not fixed rates,” wrote Rohit Arora of Forbes in a June 20, 2018 post.

Though interest rate increases will cause a minor impact on more established companies looking to obtain capital, small-scale business will have the slimmest chances of accessing cash. As a result of the growing catastrophe of access to financing, Small to medium-sized companies are now turning to a highly dedicated method of funding known as the merchant cash advance (MCA).

MCA is a substitute form of financing and not your regular traditional loan. Businesses needing a fast inflow of capital can get cash from an MCA service provider in trade for a slice of their yet to come profits or sales. Because this model doesn’t fall under traditional loans, rules on annual percentage interest rates do not apply to it.

Micro-business can get Merchant cash advances beginning $5,000 to $500,000 and enjoy more benefits than when chasing a traditional loan. They look less into the criteria that banks you to deny small business loans, e.g., credit scores, years of operation, risky industries, collateral considerations and so on.

But as you would have thought, some California-based liberals in favor of increased federal codes of practice over fair and free markets are out to eliminate this financing model.

In reaction to the attacks by the California state legislation on the MCA lending model, the Commercial Finance Coalition (CFC), a firm seeking to regulate the entire MCA industry, wrote a memo contradicting “undue hardship upon microbusinesses” by “denying them the freedom to choose whatever product they want in the merchant loan marketplace.”

Other states consider this stunt by Californian lawmakers as a precautionary measure to spot and weed out the bad actors in the sector in a manner that will distinguish the ethical finance providers offering MCAs for the benefits the of small businesses too and not themselves entirely.

“Small companies need financing to run operations and grow their bottom line, and CFC member firms offer fair market alternatives to conventional term loans filling the gap left by the drop in micro-business lending by traditional big-box banks. The protraction of this bill hurt the many SMBs across the state,” reads the letter.

Though critics have raised concerns about high-interest rates tied to MCA contracts and the need for regulation, most of them do not understand the particulars of the industry but seek to deny the free agency serving millions of small business across the US.

The bottom line

Those backing the existence of free markets and a healthy expanding economy should advocate for, instead of wage war against this ground-breaking industry. After all, banks are accepting only 25% of SMBs applications, who do we expect to meet the rest?