Are Merchant Cash Advances a Scam?

Are Small Businesses Victims of MCA Loans?

What is a Merchant Cash Advance?

A merchant cash advance (MCA) is a type of alternative financing that provides small business owners with a lump sum of money in exchange for a percentage of their future credit card sales. Designed to help businesses with short-term cash flow issues, MCAs offer several benefits. One of the primary advantages is the quick access to funding, which can be crucial for businesses facing immediate financial needs. Additionally, MCAs come with flexible repayment terms, allowing businesses to repay the advance based on their daily credit card sales. This flexibility can be particularly beneficial for businesses with fluctuating revenue. Another significant benefit is the minimal credit score requirements, making MCAs accessible to small business owners who may not qualify for traditional loans due to poor credit history.

How MCAs Differ from Traditional Loans

Unlike traditional loans, merchant cash advances are not bound by loan usury laws, which means they can offer more flexible repayment terms and higher loan amounts. This flexibility extends to the lack of collateral or personal guarantees required, making MCAs a more accessible option for small business owners who may not have substantial assets or a strong credit history. Traditional loans often come with stringent requirements and lengthy approval processes, whereas MCAs provide a quicker and more straightforward path to obtaining necessary funds. This makes them an attractive option for businesses needing immediate financial relief.

Common Uses for MCAs

Merchant cash advances are commonly used by small business owners to cover unexpected expenses, such as equipment repairs or inventory purchases. These advances can also be instrumental in funding business expansion or growth initiatives, such as hiring new employees or launching a marketing campaign. The flexibility and quick access to funds make MCAs a versatile financial tool for addressing various business needs. Whether it’s managing seasonal fluctuations in revenue or seizing a new business opportunity, MCAs provide the necessary capital to keep operations running smoothly.

How Merchant Cash Advances Work

The Application and Approval Process

The application and approval process for a merchant cash advance typically involves several straightforward steps:

1. Application Submission: The business owner submits an application to a merchant cash advance company, providing basic information about their business, including their monthly revenue and credit card sales history.
2. Review and Assessment: The MCA company reviews the application and assesses the business’s creditworthiness based on their credit score, bank account statements, and other financial documents. This step is crucial for determining the risk and the terms of the advance.
3. Offer and Agreement: If the application is approved, the MCA company offers the business owner a loan amount and repayment terms. These terms may include a factor rate, repayment schedule, and the percentage of daily credit card sales that will be used for repayment.
4. Agreement Signing: The business owner reviews and signs the agreement, accepting the terms and conditions laid out by the MCA company.
5. Disbursement of Funds: Once the agreement is signed, the MCA company disburses the loan amount into the business’s bank account, providing immediate access to the funds.
7. Repayment: The business owner repays the loan by allowing the MCA company to deduct a percentage of their daily credit card sales or bank account deposits. This automatic deduction continues until the advance is fully repaid.

This streamlined process makes merchant cash advances an attractive option for small business owners who need quick access to capital without the lengthy approval times and stringent requirements associated with traditional loans.

Is a Merchant Cash Advance Ever a Good Idea?

Eighty-two percent of businesses fail due to cash flow issues. Cash flow problems happen your payables outpace your receivables. Accounts receivable factoring with Bankers Factoring provides an alternative to using expensive Merchant Cash Advances for payroll or cash flow funding.

Small businesses, startups, and growing companies may have obstacles to obtaining a bank loan.

Some reasons for a bank turndown include the following:

• Poor credit
• Lack of financial statements
• IRS Tax Issues
• Length of time in business
• Recent bankruptcy

Why Turn to an MCA Loan?

 Many times, entrepreneurs will turn to a merchant cash advance company for an MCA loan since it is fast and easy to qualify for versus traditional loans. However, the costs ranging from 75%-700% APR will eventually leave a business owner in worse financial shape.

Merchant cash advances give you a lump sum of money that you can pay back over time with future credit card sales and transactions. MCAs, like any other financial product, have advantages and disadvantages. One advantage is that your company’s cash flow will improve right away. You will have enough cash on hand to pay off past-due, current, and future debts. However, one significant disadvantage is that MCAs are costly, and repaying them may eventually worsen your company’s financial status.

If you have solid B2B or B2G receivables and are interested in learning more about Bankers Factoring and our less costly accounts receivable factoring program, visit our previous article Why Companies Use AR Factoring.

Let us take a closer look at merchant cash advances to see if they could be a viable answer for your cash flow issues.

How much does merchant cash advance cost?

A merchant cash advance has three cost components.

1. The cash advance

The amount of money you request and receive upfront is referred to as a cash advance.

2. Amount to repay

The entire amount you will repay for the merchant cash advance is the repayment amount. An actual annual percentage rate does not exist for a merchant cash advance because it is not officially a loan. However, this does not negate the fact that MCAs incur additional expenditures. Typically, various fees are associated with MCAs, contributing to the overall repayment amount. Depending on how quickly you repaid the merchant cash loan, an equivalent APR of more than 80% may be calculated.

The factor rate, which is how the financing company decides the cost of your cash advance, is the most significant MCA fee. Your lender multiplies your cash advance by the factor rate to get the final repayment amount, which typically runs from 1.1 to 1.5.

For example, if you acquired a $100,000 cash advance and the only factor influencing your borrowing cost was a 1.2-factor rate, your total repayment amount would be $120,000, making your fee $20,000 – virtually a 20% fee on your cash advance.

Your factor rate is determined by several factors, including your industry, business health, and credit card sales history, all of which contribute to the financing company’s risk assessment.

3. Holdback rate

The percentage of daily debit and credit card sales used to repay your cash advance is known as the holdback rate. Rates of holdback vary from 5% to 33%.

For example, you received a $100,000 merchant cash loan with a 1.2 rate factor with a 20% holdback rate. Repayment would commence immediately at approximately $1900 per day for 63 business days. So, if your typical daily debit and credit card sales are $10,000, and you are open for business daily, repaying the $120,000 advance may take more than three months.  This MCA would have an APR of over 156%.

While your overall repayment amount remains constant, your payments will fluctuate daily, depending on your sales volume. You will owe more toward your daily balance if your sales improve. You will owe less money if your sales drop.

Pros and Cons of Merchant Cash Advances

While the idea of getting cash quickly for your business can be tempting, consider the benefits and drawbacks of merchant cash advances before utilizing this form of financing.

Pros	Cons
You are not required to provide any collateral	MCAs cost 7-20 times more expensive than AR Factoring with hidden fees charged
Higher chance of financing approval	You can end up in much more debt and be chased by a debt collector
Provides one-time funding	No Federal Government Oversight with brutal legal documents and contractual terms
Bad credit is OK	Higher Sales = Higher APR
Easy money	Up to high triple-digit APR
	No A/R Protection opposed to non-recourse AR Factoring

The advantages of MCA’s are not very robust. Yes, you do not have to leverage your home, cars, or other assets as collateral which is positive. However, the extremely high APR percentages and lack of Legislative oversight create many red flags for MCAs. Merchant cash advances were approved 79% of the time, according to a 2017 Federal Reserve survey, and are being investigated by the federal trade commission (FTC).

MCAs: High Approval Rate with High Default Rate, too

While the chances of approval are high, which creates an advantage for businesses seeking funding, MCAs are very risky. However, once you secure one MCA, the chances of “stacking” or obtaining more MCAs increase. The vicious debt cycle can hurt business owners, which can be avoided by not securing merchant cash advances.

For small firms, a merchant cash advance might be dangerous. Backed by Confessions of Judgment and Personal Guarantees, merchant cash advance companies can quickly seize your assets and force you into bankruptcy using loan shark-type tools, which are against the law for consumer debt collectors and a collection agency.

An MCAs factor rate is fixed, so paying it off early will not reduce the MCA’s cost, contrasting with how interest works on a traditional loan. Paying your amount paid early on a personal loan, for example, may allow you to spend less overall to borrow the funds.

The lack of government oversight has led to MCAs being scrutinized by consumers and businesses for many reasons.

According to a 2018 Federal Reserve report, here are some complications with MCAs:

• It was not easy to ascertain the actual cost.
• Merchant cash advances were described in a way that was either ambiguous or confusing.
• The language used in the MCA industry was bewildering.
• Where to file a complaint?
• Based on previous experiences with traditional bank loans, consumers will make mistakes and assumptions regarding merchant cash advances.

Instead of federal government oversight, the Uniform Commercial Code governs each state. Merchant cash advances are exempt from banking legislation such as the Truth in Lending Act, which requires lenders to disclose loan costs to protect consumers from inaccurate and unfair lending practices. MCA loan scams, indeed.

Accounts Receivable Factoring as an Alternative to MCA’s

Account Receivable Factoring, or AR Factoring, also called invoice factoring, is a cash flow tool for companies lacking working capital. Rather than taking on expensive MCAs, A/R Factoring carries no debt on your balance sheet and provides immediate business funding. To learn more about Accounts receivable factoring, visit our previous article, The Pros and Cons of Invoice Factoring.

A/R Factoring with Bankers Factoring includes credit protection, risk management, and A/R management, providing enhanced value for your financial performance.  Our accounts receivable factoring clients are rewarded for growing their businesses.  Unlike MCAs, your factoring line increases as your billings do.  The MCA is a one-time funding event that you pay daily from your bank account.  Explore the possibility of growing your sales from $50,000 to $3,000,000 per month and having unlimited working capital and credit protection with Bankers Factoring.

A/R Factoring to Help Small Business Cash Flow

If your business lacks the cash flow or cash reserves to sustain operations or take on new business, A/R Factoring with Bankers Factoring can help your business. All your business needs are legitimate invoices or accounts receivable for delivered and completed work to commercial customers. Accounts receivables factoring provides businesses cash flow to meet payroll, buy inventory, take on new customers, and cover overhead. To learn more about cash flow solutions, visit our previous article, 12 Common Cash Problems and Solutions.

A/R Factoring with Bankers provides excellent benefits for businesses struggling to make ends meet.

  Here are some of the reasons why our clients prefer A/R Factoring with Bankers over MCAs:

• A/R Management and 24/7 reporting
• We take on the credit risk with our non-recourse A/R Factoring
• Credit Protection
• SBA Lenders will subordinate to factoring companies more readily.
• Bank turndown friendly
• Up to $3 million monthly A/R Factoring lines
• Unlimited working capital
• Factoring is a better option for payroll funding
• No hidden fees
• Factoring rates are much cheaper than MCA loans.
• The quick approval process with same-day funding

You get much more than working capital from a factoring company like Bankers Factoring.  The best news is we help fix your cash flow issues, not continue to strain them like MCAs.

You can also read how much factoring companies charge.

MCA Loan Bottom Line

A merchant cash advance comes with significant risks. MCA companies and their high fees and complicated terms could leave you worse once that initial advance is gone. Do not jeopardize your business or personal credit with MCA loans. Contact Bankers Factoring today and learn about our accounts receivable factoring program. 

Our team of A/R factoring owner-employees is ready to help your business. We understand the importance of providing quick working capital without additional debt. Stop burdening yourself with large amounts of debt and MCA swindles. By selling your accounts receivables to Bankers, we remove the burden of collecting payments from your customers while simultaneously providing your lines of capital.   

Ready for the owner-employees of Bankers Factoring to fund your entrepreneurial dreams even with an MCA loan? Call 866-598-4295 or go to Bankers-Factoring-Application.

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