A merchant cash advance (MCA) is a relatively new product in business funding. They were originally created to provide companies with access to fast funding when banks and other lending institutions were reluctant to finance small, usually retail-oriented businesses.
MCA lenders provide a lump-sum cash advance in exchange in for a percentage of future sales. The amount they will lend is usually tied directly to the trading history of the company and the historical value of sales.
Importantly, MCAs are not loans; rather, they are an advance on future sales. For example, a small business may receive an advance of $18,000 against future sales $24,000. From this point, the MCA will receive a portion of all future sales, usually 10 percent to 25 percent. This will continue until the $24,000 is paid in full.
As MCAs are a unique financial product that is attractive to a very specific part of the financing market, these funders have the ability to charge higher rates, due in part to the fact that it is not a traditional form of financing. There are also relatively fewer MCA funders than other types of finance companies, further increasing the ability for MCA companies to have higher rates.
Rather than charge a fixed APR, the MCA provider will usually charge a fee based on the amount you wish to borrow. In the example above, the fee is $6,000. There is also the potential to incur set up fees, early repayment fees, exit fees and a host of other charges that will substantially increase the amount you need to repay, and your ability to exit the arrangement.
Because the organization does not charge interest, paying the advance back early does not reduce the amount you pay. You could instead incur extra charges over and above those originally agreed upon.
Further aspects to consider are that your trading levels may vary seasonally or even on an ad-hoc basis. This means that if you grow quicker than you expected you will end up repaying your MCA faster than you anticipated, which will vastly constrain your working capital.
If you would like to extend your MCA, most providers will require you to have repaid the majority before they will consider this as an option and therefore the flexibility is considerably less than a number of other financing options. An MCA does not have the ability to grow with you.
As the industry continues to grow, so will the unscrupulous nature of some, not all, of the players in the industry. As they are deemed ‘not loans,’ and because MCA providers operate in the commercial space, they are not regulated by most of the consumers protection agencies. The net result of this is that they are often lending money to vulnerable and desperate individuals that have very little reasonable expectation of being able to maintain such payments.
The recourse taken against individuals who find themselves in financial difficulty after receiving an MCA is often aggressive and without empathy or reasonable support to finding a fair and equitable solution. The daily withdrawals directed from your bank account by MCA providers reduce cash flow, creating more of the problem that you were trying to solve.
Further to this, because they often work directly with the merchant account, i.e. credit-card portal company, you are often not able to change the credit-card company, and you are tied into a whole host of other services when there may be more appropriate and more affordable services available to you.
These are just a small number of reasons why MCAs should be avoided. If you need a flexible cash-flow solution without the numerous drawbacks and headaches that MCAs bring, speak with one of Scale Funding accounts-receivable financing experts. Invoice factoring provides immediate cash, and the line can grow as your company grows. Scale Funding provides an array of additional services, such as collections and credit services, that strengthen your company. And at a fraction of the cost of MCAs, invoice factoring makes good business sense.
Scale Funding is an invoice factoring company serving businesses across the United States. For more information on factoring, call (800) 707-4845 for a free, no-obligation consultation and quote.
Learn more about invoice factoring and the benefits in our “Definitive Guide to Factoring.” Click here to download.