MCA Loans can be Very Fast but Very Expensive
Table of contents
- MCA Loans can be Very Fast but Very Expensive
- What is a merchant cash advance?
- Why you should avoid MCA Loans?
- What is the difference between an MCA and a loan?
- How does merchant cash advance works?
- Are merchant cash advances worth it?
- Merchant cash advances are a risky way to get funding for your business.
Working Capital at an Expensive Price
Small business funding or financing issues impact over 50% of current business owners. Merchant cash advances (MCA) seem easy to inject working capital into operations. However, depending on the information on your credit, there can be other funding options that are safer with a lower cost. That is why we want you to have a better understanding of merchant cash advances or MCA loans.
With unpaid accounts receivables (A/R), your business can fund operations within five days. Avoid a credit limit hindering your growth, and obtain a factor rate better than an MCA loan. Contact Bankers Factoring today to receive Business Financing through Receivable Factoring.
For most small businesses, the initial capital for starting and growing a business can be hard to come by. Many entrepreneurs are turning to merchant cash advances as an alternative funding source. In this post, we’ll cover what a merchant cash advance is and how it works so you can decide if this type of financing makes sense for your company versus business factoring.
Need help with payroll funding? Read about small business payroll funding.
What is a merchant cash advance?
The terms “merchant cash advance,” “merchant loan,” and “MCA loan” are often used interchangeably. A merchant cash advance is a business loan providing you with funding upfront for future payments as consideration. MCA loans can overcome cash flow issues for businesses with mediocre credit and poor customer credit accounts.
Do you already have an SBA loan? Read about funding available for companies with an SBA loan in place.
A significant issue with MCA advances is the requirement of fixed daily or weekly withdrawals to pay off the cash advance. A lender may provide funding through an MCA, but your company will be very low on cash flow once their repayment terms are in effect.
MCA financing allows your business to receive funding immediately and pay it back with future credit or debit card payments from your customers. Cash management is a major issue for companies that extend credit terms to their customer base.
You can also read how to obtain funding after a bank loan denial.
A better method for quick, short-term funding is selling your unpaid invoices. The practice of invoice factoring is less costly than MCA’s and provides cash protection from customer default. At the same time, the MCA loan leaves your company on the hook.
Repayment terms vary from MCA providers, but programs typically run high-interest rates. Also, with this type of loan, most of your future credit card payments will disappear to the lender.
Read our previous article, “Are Merchant Cash Advances a Scam?”
Why you should avoid MCA Loans?
Business owners quickly make a deal when they find access to working capital. However, MCA loans seem like a good idea initially, but they come with strict conditions and repayment terms. Also, the high-interest rates of 70-300% with merchant advances create a situation where you will eventually repay much more than you borrowed.
With invoice factoring, you only have a fixed percentage of your A/R value per 30 days, around 1% to 2%, which is your cost of money. Invoice factoring will save your company thousands of dollars due to the financing structure compared to merchant cash advance loans.
- High-interest rates
- Fixed repayments
- Complex contract agreements
- A continuous cycle of debt – never cash flow positive
What is the difference between an MCA and a loan?
A merchant cash advance is a short-term loan to fund your business. A loan, on the other hand, is a long-term financial commitment. Both forms of business funding help relieve daily cash flow issues. The application process can differ between SBA Loans and merchant cash advances (MCA).
The easiest application process for fast business funding is with Banker Factoring. Our 100% online process enables your company to have cash deposits within 3 to 5 days. If you have unpaid A/R invoices, invoice factoring is the easiest method to cover cash flow issues and have access to working capital.
MCA loans provide businesses with fast working capital based on future sales through credit. Your company receives a lump sum and pays it back with credit card transactions or a daily ACH from your business checking account. Merchant advances require fixed repayment, unlike factor financing. A more efficient funding vehicle is factoring invoices.
If your company has daily or weekly payroll issues, selling unpaid invoices is the best solution to finance your plans. Invoice funding is a better solution than MCA loans for businesses needing funding. When selling invoices, your factoring rate is accounted for, which means you have no recurring repayments or interest to worry about.
The common solution for short-term cash flow bridges is to sell your unpaid invoices. Also called factoring invoices, it is an easy method to boost cash flow and execute business operations.
Please read understanding factoring rates and fees.
In general terms, MCA Loans:
- Loans are secured by collateral (e.g., a house or car). If you fail to make payments on your loan, the lender will seize your collateral and sell it off to recoup their losses from lending you money in the first place.
- MCA funding is more flexible compared to small business administration loans
- Your credit score will matter for both types of loans. MCA loans may only require a soft credit pull.
Read our previous article, “A Guide to Acquiring a Line of Credit with Bad Credit.”
How does merchant cash advance works?
A merchant cash advance is a short-term loan for businesses. It’s a type of financing that requires you to apply for credit. A FICO Score or a credit report from a major credit bureau is typically required.
Business lending, such as a small business loan, depends on a complex credit report and established financial statements. However, another mainstream funding tool is factoring invoices or selling uncollected accounts receivable. Invoice factoring can save money, protect your cash flow, and help your business grow – MCA loans rarely do the same.
The merchant cash advance process involves three steps:
- You apply online or by phone;
- The provider sends you a quote;
- Once approved, the MCA financing company deposits funds directly into your bank account (or PayPal account).
If your business has cash flow issues, read our article, 12 Most Common Business Cash Flow Problems, and Solutions.
Are merchant cash advances worth it?
Merchant cash advances are a viable way for small businesses to get funding for their business. If you need capital and want to grow your company, consider applying for a merchant cash advance. Understanding other mainstream funding sources is essential, like non-recourse invoice factoring can help you.
Non-recourse factoring is a smarter option to fund your business in a cash flow crunch, over-extending customer credit, or facing seasonal sales. Merchant cash advances tie up your future cash flows in a fixed manner – once you sell your invoices, you are responsible for accruing interest fees. Interest fees kill your cash flow and bottom-line profitability.
You can use the money to pay off debt, purchase equipment or software, or hire new employees. You need a financing option if you are a business owner with bad credit. Access to different types of credit for a fraction of the cost is achievable with factor financing.
Merchant cash advances are a risky way to get funding for your business.
Merchant cash advances are a risky way to get funding for your business. Whereas offloading unpaid invoices and immediately creating positive working capital has more protection. MCA loans require fixed repayments. Once you sell invoices, the factoring rates are simply taken off the top. The option of invoice factoring is a viable method to get business funding for companies in tough financial situations.
Invoice factoring can be used to grow your business, pay off debt, and more. However, other sources for working capital, like non-recourse factoring, can save you money and build your credit.
- You will receive the funds quickly. It only takes a few days or weeks until you have access to the money in your account so you can use it immediately. This means there’s no need to wait months before receiving funding; it should be available immediately.
- You must worry about interest rates or collateral because these two things apply to this loan. The only thing that matters is how much profit you make on each transaction (the “margin”) to the business owner.
MCA Loan Conclusion
If you’re looking for a way to get funding for your small business, merchant cash advances are a viable option but come with a steep cost.
Invoice factoring funding is simpler to apply for and can quickly provide the money you need. The key is finding the right provider so both parties benefit from this financing arrangement.
Different credit scoring models can hurt your chances of commercial financing. At Bankers Factoring, our team of factoring leaders customizes a plan that saves your company from major losses.