MCA Laws in South Dakota: What Business Owners Need to Know
South Dakota is one of the most business-friendly states in the country when it comes to financial regulation. The state has no usury cap, which means there is no legal limit on interest rates for loans, and it has not passed any legislation specifically targeting merchant cash advances. For MCA companies, South Dakota is a very permissive environment.
This guide explains what South Dakota business owners should know about MCAs and the limited protections that exist under current state law.
Current MCA Regulations in South Dakota
South Dakota does not regulate MCAs. The state's Division of Banking oversees banks, trust companies, and licensed lenders, but MCA companies are not required to obtain a license or register with the state because MCAs are structured as purchases of future receivables rather than loans.
No Usury Cap
South Dakota is unique in that it has no constitutional or statutory usury limit. This is why many national banks and credit card companies are chartered in South Dakota. For MCA transactions, the absence of a usury cap means that even if a court were to reclassify an MCA as a loan, there would be no interest rate ceiling to violate.
This is an important distinction from states like California or New York, where a court finding that an MCA is actually a loan could trigger usury violations. In South Dakota, that argument does not apply.
No Disclosure Requirements
South Dakota has no commercial financing disclosure law. MCA companies operating in the state are not required to provide standardized disclosures about APR, total cost of financing, or payment terms. This means you will need to calculate and compare costs on your own.
Confession of Judgment Rules
South Dakota does not have a specific statute prohibiting confessions of judgment in commercial transactions. This means that if you sign an MCA agreement with a COJ clause, it could potentially be used against you.
However, South Dakota courts generally require proper procedural protections before enforcing judgments. If an MCA company obtains a COJ judgment in another state (such as New York), enforcing it in South Dakota would require domestication through South Dakota courts. You would typically have the opportunity to raise defenses at that point.
Be cautious about COJ clauses in MCA contracts. Even in a business-friendly state like South Dakota, a confession of judgment can allow a funder to freeze your bank accounts or seize assets with little warning.
UCC Filing Rules
MCA companies file UCC-1 financing statements with the South Dakota Secretary of State to secure their interest in your business's future receivables. These filings create a public record that other lenders and creditors can see.
What you need to know about UCC filings in South Dakota:
- You can search for UCC filings through the South Dakota Secretary of State website
- UCC filings are effective for five years from the filing date
- After you pay off an MCA, the funder must file a UCC-3 termination statement within 20 business days of receiving your written demand
- Failure to terminate a UCC filing after receiving your demand may give you a claim for damages under the Uniform Commercial Code
Multiple active UCC filings can make your business appear over-leveraged and reduce your chances of getting approved for traditional financing. Always confirm that old filings are properly terminated.
Consumer Protection Laws That Apply
South Dakota's Deceptive Trade Practices and Consumer Protection law (SDCL Chapter 37-24) prohibits deceptive acts or practices in business transactions. While this statute is primarily focused on consumer transactions, it can apply in some commercial contexts.
If an MCA company makes false representations about the terms of the advance, hides fees, or uses deceptive collection practices, you may have a claim under this law. The South Dakota Attorney General's Consumer Protection Division handles complaints and can investigate deceptive business practices.
Federal protections also apply. The FTC Act prohibits unfair or deceptive practices, and the Uniform Commercial Code (as adopted in South Dakota) provides baseline rules for commercial transactions.
Recent Legislation and Court Cases
- No MCA-specific bills. South Dakota has not introduced any legislation to regulate MCAs or require commercial financing disclosures. Given the state's business-friendly regulatory philosophy, this is unlikely to change in the near term.
- Banking hub status. South Dakota's lack of a usury cap has made it a hub for financial services companies. This regulatory environment extends to commercial financing, including MCAs.
- National trends. While states like California, New York, and Virginia have passed commercial financing disclosure laws, South Dakota has shown no indication of following their lead.
- Federal oversight. The FTC and CFPB have taken enforcement actions against MCA companies nationally, and those actions apply regardless of state law.
What South Dakota Business Owners Should Do
If you are considering an MCA in South Dakota or already have one, take these steps:
- Calculate the true cost yourself. Since South Dakota has no disclosure requirements, you need to figure out the APR equivalent on your own. Take the total repayment amount, subtract the amount you received, and divide by the amount received. Then annualize that figure based on the expected repayment period.
- Watch for confession of judgment clauses. South Dakota does not ban COJs, so read your contract carefully. If you see a COJ clause, understand that you may be waiving your right to be notified before a judgment is entered against you.
- Search your UCC filings. Check the South Dakota Secretary of State website for any active UCC liens on your business. Make sure old liens have been terminated.
- Compare with traditional financing. Contact the South Dakota Small Business Development Center for free counseling on SBA loans, business lines of credit, and other options that may cost less than an MCA.
- Document everything. Keep copies of all MCA agreements, payment records, and communications with the funder. If a dispute arises, documentation will be critical.
Helpful Resources
- South Dakota Division of Banking for banking and financial regulation information
- South Dakota Attorney General, Consumer Protection for complaints about deceptive business practices
- SBA South Dakota District Office for alternative financing resources
- South Dakota Small Business Development Center for free business counseling
Frequently Asked Questions
Does South Dakota have a usury cap that applies to MCAs?
Are MCA companies required to be licensed in South Dakota?
Does South Dakota require MCA companies to disclose APR?
Where can I file a complaint against an MCA company in South Dakota?
Sources
- South Dakota Division of Banking. Regulatory oversight of financial institutions in South Dakota.
- South Dakota Secretary of State, UCC Filings. Search for UCC liens filed against your business.
- SBA South Dakota District Office. Federal small business resources for South Dakota businesses.
- South Dakota Small Business Development Center. Free counseling and resources for South Dakota small businesses.