Franchise Finance
The CFPB's revised Section 1071 rule, effective June 30, 2026, removes MCA lenders from reporting requirements — reducing transparency in a financing product linked to multiple franchisee bankruptcies.
A merchant cash advance is a purchase of a portion of a business's future receivables at a discount. MCA providers advance a lump sum in exchange for a fixed percentage of daily credit card sales until the advance is repaid. Franchise buyers sometimes use MCAs for short-term capital needs because MCAs have faster approval timelines than traditional SBA or bank loans. However, MCAs can carry effective annual rates from 40% to over 350%, and repayment draws are taken daily regardless of cash flow fluctuations.
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If MCAs had remained in scope under Section 1071, MCA providers would have been required to report loan-by-loan data including pricing terms, application outcomes, and borrower demographic information — the same transparency that exists for traditional small business loans. That dataset would have allowed regulators and borrowers to identify pricing disparities and compare MCA terms across providers. The May 2026 rule eliminates that requirement.
No. The exclusion applies only to Section 1071 data collection. MCAs remain subject to state-level regulation: California, New York, New Jersey, Virginia, and Utah have passed or proposed laws requiring enhanced transparency in MCA agreements. Federal consumer protection laws against deceptive practices also continue to apply. However, the removal of federal reporting requirements means there is no centralized, national dataset for comparing MCA pricing or approval patterns.
On May 1, 2026, the Consumer Financial Protection Bureau issued a revised final rule under Section 1071 of the Dodd-Frank Act that expressly excludes merchant cash advances from its small business lending data collection and reporting requirements. The rule takes effect June 30, 2026 — eleven days from today. The change reverses the CFPB's 2023 position, which treated MCAs as credit under the Equal Credit Opportunity Act and would have required MCA providers to collect and report data on the financing they extend. The practical result for franchise buyers is a return to a financing environment where MCA pricing, terms, and approval patterns are opaque by regulation — at the same time that MCA debt has been a named driver in multiple high-profile franchisee bankruptcies in 2025 and 2026.
On May 1, 2026, the CFPB issued a final rule amending its small business data collection and reporting requirements under Section 1071 of the Dodd-Frank Act [1]. The Amended Rule expressly excludes merchant cash advances from its coverage. Since MCAs are not covered credit transactions under the final rule, no MCA provider will be required to report data on the advances they extend to small business borrowers [2].
The change reverses the CFPB's 2023 position, in which the agency treated MCAs as credit under the Equal Credit Opportunity Act and included them in its initial Section 1071 rulemaking. The CFPB's stated rationale for the reversal: its earlier one-size-fits-all approach was too broad because it failed to account for the diversity of MCA structures in the marketplace, ongoing regulatory evolution at the state level, and the lack of federal case law evaluating MCAs under ECOA [2]. The rule takes effect June 30, 2026, though the compliance date for data reporting by covered lenders is January 1, 2028 [1].
Merchant cash advances have become one of the most common short-term financing tools for franchise operators, particularly those who need capital faster than the SBA loan process allows or who do not qualify for conventional bank credit. The problem is that MCAs are structurally expensive: the effective annual rate on a typical MCA ranges from 40% to over 350%, depending on the factor rate and repayment pace [3].
When MCA debt stacks — when an operator takes a second or third MCA advance to cover the daily draws from the first — it can rapidly consume operating cash flow. Multiple high-profile franchisee Chapter 11 filings in 2025 and 2026 identified MCA debt as the primary or contributing cause of financial distress. The MTF Enterprises (Subway franchisee) Chapter 11 filing in January 2026 specifically cited daily and weekly MCA draws as the primary cause of the company's financial problems.
The CFPB's reversal removes the only federal mechanism that would have created a national, comparable dataset on MCA pricing and approval patterns. That dataset would have enabled regulators, researchers, and prospective borrowers to understand what different MCA providers charge for similar advances, and to identify potential discriminatory pricing patterns. Without it, MCA pricing remains opaque: a franchise buyer who approaches three MCA providers has no regulatory baseline for evaluating whether the rates offered are competitive.
Watch for whether the CFPB revisits MCA classification under ECOA more broadly, separate from the Section 1071 rulemaking. The agency specifically noted it was not adopting a position that MCAs are definitively not credit under ECOA — leaving the question open for future enforcement or rulemaking [2].
For franchise buyers who are evaluating MCA financing for a franchise acquisition or working capital, the practical guidance is straightforward: the absence of federal reporting requirements does not reduce the risk of MCA debt. Before taking any MCA advance, model the daily draw against projected operating cash flow under multiple revenue scenarios, compare offers from multiple providers, and consult a franchise financial advisor about whether alternative financing — SBA 7(a) loans, equipment financing, or franchisor-provided financing programs — is available at a lower all-in cost.