In a case that could dramatically change the city's lending industry, a court ruled that a cash-advance product offered to businesses is not a loan and does not breach the Money Lenders Ordinance.
Global Merchant Funding Limited was cleared yesterday of one charge of carrying on business as an unlicensed money lender after a trial at Eastern Court.
The ruling alarmed some in the industry, who say it goes against efforts to better regulate cash-advance products, but the man behind GMF hailed the verdict as 'excellent news' for small and medium-sized businesses.
GMF offers a merchant-cash-advance contract, under which it buys a merchant's future credit and debit card receipts at a discount, in return for offering cash up front. It takes a percentage of card sales directly from the merchant's processing bank and does not set a deadline for repayment. Prosecutors argued that the product was, in fact, a loan.
'The effective rates of return show that a very high level of interest is built into the purchased amount,' prosecutor Clifford Smith SC told the court.
But yesterday Magistrate Li Kwok-wai ruled that GMF had not been in breach of the ordinance. 'There have been and always will be newly emerging products,' he said.
The magistrate noted that a loan would usually carry a time element - a deadline by which it must be paid - but that this did not exist in GMF's cash advances.