Although from a legal perspective a MCA is treated as a purchase of future receivables and not a loan, for a number of reasons which are outlined in the footnote[1], the transaction is subject to Hilchos Ribbis. The following are recommended guidelines to avoid violating any issurim:
· If either the funder or seller is not jewish, the laws of ribbis will not apply. A broker can make a point of matching jewish sellers with non-jewsh funders, and jewish funders with non-jewish sellers to completely avoid all Ribbis concerns.
· An advance to an entity without any personal guarantee or COJ may not be subject to Hilchos Ribbis according to the Psak of the Igros Moshe[2]. Those that follow this ruling may fund a jewish-owned borrower, provided there is no personal guarantee. See footnote below for a more detailed discussion about common MCA contracts in use today[3].
· A heter Iska can be executed to permit a MCA transaction between Jews. Best practice is to have the seller execute a heter iska. Alternatively, the funder can execute a general heter iska klali, and insert a sentence into the funding contract that the transaction is subject to the Heter Iska. Sample Heter Iska forms are attached to these guidelines.
· Note that a Heter Iska is an agreement between the funder and the seller- a broker cannot execute a heter iska for the transaction unless authorized to do so by the funder.
Note that the rate of return permissible on a heter iska must be in line with the ‘borrowers’ expected profit level. Instances where the ‘borrower’ clearly does not generate such levels of return can be problematic, and a Rav should be consulted.
[1] While it is permitted to sell a debt at a discount, an MCA is unique in that the receivables that are being sold do not exist yet, which is considered in halacha as a קנין בדבר שלא בא לעולם. Furthermore, the permitted case is when a specific debt is being sold, and the buyer assumes liability for default- an MCA is not tied to a specific debt or customer, and regardless of the default or loss of any specific sale, the seller must repay the full amount as long as there is revenue to cover it (every loan is effectively a commitment to repay the lender from future revenue that the borrower receives). An MCA is clearly not an ‘iska’, as the transaction is not predicated on the seller making any profits during the deal- as long as the revenue stream is sufficient, the buyer will earn his return even if the seller is operating at a loss. Lastly, even true sales of goods that will be delivered in the future are problematic if there is a commitment of a specific value (see Yoreh Deah 173:9), which is clearly the case in a MCA transaction.
[2] Yoreh Deah 2:63
[3] Virtually all MCA’s have a personal guarantee or COJ, which eliminates this Heter. However, if the default provisions that trigger the personal guarantee are limited to instances of direct fraud, the Heter of the Igros Moshe may apply. In practice, many contracts today have fairly broad and aggressive definitions of defaults, and simply admitting in writing that the company cannot afford to pay would trigger a default- such contracts would clearly be problematic even according to the Igros Moshe.
INTRODUCTION
The undersigned Parties are entering into a Merchant cash advance transaction. Although the transaction is a purchase of future receivables, from a Jewish religious perspective it may be treated as a loan that is subject to the laws of Ribbis. This Shtar Iska document is designed to structure the transaction in a manner that is permissible under Jewish religious law.
THE AGREEMENT
I, ______________________, personally and on behalf of _____________, have received funds from_______________________ (“FUNDER”) for the purpose of transacting business. All profits and losses generated by said funds shall belong to FUNDER, with any loss proven by two Halachicly acceptable witnesses, and all profits verified by solemn oath before a Bais Din. However, FUNDER has agreed that I have the option of making the payments specified in various agreements executed between us as payment in full for FUNDER’s investment, in which case I shall have no further obligation with respect to the above-mentioned verification and any other profits which may be earned by the advanced funds.
FUNDER shall make a token payment of $1.00 for my efforts in connection with this undertaking, which is reflected in the above–mentioned profit payment.
The parties acknowledge that additional documents have been executed by the parties regarding these funds. Said documents shall be interpreted in a manner consistent with this Iska and the Laws of Ribbis, and to the extent necessary by halacha, said documents shall be superseded by this Shtar Iska. This Iska shall also govern the guarantee agreements and COJ. Any prepayments made that are not justified by this Iska agreement shall reduce the principal balance of this Iska. However, any future payments made to avoid providing the above-mentioned verification, shall remain consistent with the agreements executed between the parties.
This Iska has been executed in accordance with all applicable halachic requirements.
We hereby affix our signatures on this ___ day of _____________.
__________________, personally and on behalf of _________________, Recipient
__________________, Guarantor
____________________, Funder
General Heter Iska
(to be executed by the principals of the Funder, and a clause inserted into the funding contracts that it is subject to the terms of the Funder’s Heter Iska)
We the undersigned, hereby declare on behalf of ____________________ that all financing arrangements that we enter into, including any credit sales, terms, prepayment discounts, factoring, loans, cash advances, purchase of receivables, guarantees, or any other transactions that would violate any of the laws of Ribbis, shall be structured as an Iska investment, subject to the following terms.
In exchange for the funds or merchandise advanced, the recipient shall transfer to the investor a share (of equal value) in his halachically permissible assets as an Iska. This investment shall be owned by the investor, and all profits, capital gains, or losses shall be his sole responsibility. The recipient shall manage this investment on behalf of the investor, in the manner deemed most beneficial to the investor. The recipient shall receive one dollar as compensation for managing this Iska. The recipient must verify any claim of loss through the testimony of two Halachacly acceptable witnesses in an Orthodox Jewish court of law. Any claim regarding the amount of profits generated by the joint venture must be verified with a solemn oath, administered by an Orthodox Jewish court of law.
It is agreed that if the recipient pays/provides merchandise as per the sale/purchase/financing agreement executed between the parties, as payment for the investor’s share of the principal and profits of the Iska investment, the investor shall waive his right to demand verification of the results of the investment. Any additional profits shall belong solely to the recipient. Such payment shall reflect a final settlement, and the recipient shall have no further claim for compensation or management fees.
This document shall override any other agreements, even those that do not reference this document. Any mention of interest, terms, fees or discounts shall be interpreted as an Iska and to payments mentioned above. This declaration is legally binding and may be enforced in any Jewish or civil court.
This agreement has been executed in an effective manner and with a proper Kinyan.
Signed on this day __________________
__________________________________ ______________________________