Are Small Businesses Victims to MCA 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 obtaining a bank loan. Some reasons include:
- Poor credit
- Lack of financial statements
- IRS Tax Issues
- Length of time in business
- Recent bankruptcy
Many times entrepreneurs will turn to a merchant cash advance or MCA loan since it is fast and easy to qualify for. However, the costs which can run 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 worsen your company’s financial status eventually.
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.
What is an MCA?
An MCA is a financial instrument that transforms projected debit and credit card sales and transactions into current cash. These cash advances are not loans because there is no bank, no interest rate, and no defined repayment date. Instead, a financing business will provide a lump sum payment in exchange for a proportion of future sales — often known as receivables — as repayment. Debit and credit card sales and transactions are the most common payment methods for these receivables.
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 MCA’s, 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 runs typically 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 right away at approximately $1900 per for 63 business days. So, if your typical daily debit and credit card sales are $10,000, and you are open for business every day, 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 from day to day, depending on your sales volume. You will owe more toward your balance for the day 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 |
| Higher chance of financing approval | You can end up in much more debt |
| Provides one-time funding | No Federal Government Oversight |
| Bad credit is OK | Higher Sales = Higher APR |
| Up to 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.
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 move quickly to seize your assets and force you into bankruptcy using loan shark-type tools which are against the law for consumer debt collectors.
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 are likely to make mistakes and make 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 MCA’s, 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 business. 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 have 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 receivables 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
- Up to $3 million monthly A/R Factoring lines
- Unlimited working capital
- No hidden fees
- Quick approval process with same-day funding
You get so much more than just 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.
Bottom Line
A merchant cash advance comes with significant risks. Its high fees and complicated terms could leave you in worse shape 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 and not taking on 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.