By Rabbi Yair Hoffman

There is a relatively new business in which huge profits are being made–it’s called merchant cash advances. This business is also relatively safe for the investor. According to New York State law, as it currently stands, these transactions are not defined as loans–and therefore the state usury laws do not apply. Investors are often making the equivalent of 40% annual interest.

This author predicts, however, that within 12 months either a new law will be passed or the higher courts are going to overturn this law because merchants are being taken advantage of in these high-stakes “non-loans.” In the meantime, however, is this new business halachically permitted in terms of the laws of ribbis when “purchasing” the future sales of a Jewish merchant?

 

How It Works

Originally, the merchant cash advance (MCA) was structured as a sale of an agreed-upon percentage of future credit-card or debit-card sales. Say, for example, a furniture store needs some cash. They can sell 33% of their next $100,000 worth of credit- and debit-card sales. For that sale, they can immediately receive $25,000 up front. The credit-card payments are placed in a special account from which the investor takes his 33% off the top. The contract is usually structured in a way where full repayment is made within 12 or 24 months and smaller payments are made into the account each day. The payments are taken directly from the credit-card processor. A number of the cash-advance companies actually form partnerships with the payment processor, and a number of them are Jewish.

 

Is It A Loan?

According to a judge’s ruling, the whole edifice is not legally considered a loan. In the eyes of the law, thus far, it is just a business partnership. The ruling was issued on June 10, 2016, by the Honorable Jerome C. Murphy in the case of Platinum Rapid Funding Group v. VIP Limousine Services. He wrote in his ruling, “If the transaction is not a loan, there can be no usury.”

But while for the time being it is not considered a loan in the eyes of the law, what about halachah? Is it considered a loan in terms of halachah, and, if so, would it be permitted for a Jewish provider to “purchase” the future credit-card sales of a Jewish-owned company?

 

Purchasing Something That Doesn’t Yet Exist

There is a concept in halachah that one cannot purchase something that does not yet exist. This is a debate in several places in the Talmud where Rabbi Akiva and Rabbi Meir are of the opinion that one may purchase something that does not yet exist. The rabbis are of the opinion that one cannot make such a purchase. The halachah is in accordance with the rabbis, as found in Shulchan Aruch (Choshen Mishpat 209:4). Since that is the case, this purchase would not be considered a purchase at all and would actually be considered a loan.

If it is considered a loan and it is loaned to a Jewish client or a Jewish-owned corporation, then a heter iska is required.

 

Could It Be Construed
As A Partnership Purchase?

If we look at the entire arrangement as a partnership, then it could possibly be permitted–except for one thing. These agreements usually have a personal guarantee attached to them, such that if the proceeds from the sale of the future transactions do not reach the amount agreed upon, the client takes full personal responsibility. What this means, essentially, is that this has effectively become a loan.

 

Is There An Opinion
That Permits It?

Rav Moshe Feinstein, zt’l (Igros Moshe YD II #62) writes that perhaps a person may loan money to a corporation without violating the restriction of ribbis. Some poskim disagree with this leniency, and even Rav Moshe did not present it as a definitive ruling. Many poskim forbid excessively high interest rates–even with a heter iska. This is because it negates the underlying concept of a heter iska–that it is a partnership arrangement with split profits. The amount that poskim forbid even with a heter iska is 15% to 18%.

As we explained in last week’s column, a heter iska is essentially a document which converts a monetary loan into a joint business venture, with a silent partner and an active partner. Originally, the idea was based upon a Gemara in Bava Metzia 104b. The active partner accepts responsibility on a certain percentage (often half of the amount), while the silent partner accepts responsibility on any profits or losses involving the other portion of the money. The problem is that now there is a ribbis problem the other way. The active partner is working on behalf of the silent partner without pay. This is benefiting the silent partner for use of the money. The solution is that if the silent partner pays the active partner for his work or time, then the ribbis problem is addressed when arrangements were made beforehand. However, since the silent partner is also working for himself, only a minimum or symbolic payment is necessary. The custom is thus for the banker to pay the person taking the loan a $1 bill.

 

Future Prospects

It is this author’s belief that, eventually, Judge Murphy’s ruling will be overturned, as there is a growing realization that regular businesses will arrange for different types of loans. In theory and practice, these “advances” constitute predatory practices. Only businesses with low credit ratings avail themselves of these types of financing.

Insiders in the industry explain that prior to the June ruling, it was a $3 billion-a-year field. Since the June ruling, it has skyrocketed and predictions are that it will double.

In short, it is not a simple business model and one should refrain from making such loans in a form that would constitute ribbis. Everyone should consult with his or her own rav. v

The author can be reached at yairhoffman2@gmail.com.

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