How an "MCA Loan" is Not a Loan and Why You Should Be Ready For What is Next.
- Thomas Tramaglini
- Jun 4
- 4 min read
Because most small business owners regularly access funds through the alternative lending industry mainly because they cannot access financing from their bank or through Small Business Administration (SBA) programs because of various requirements which include high credit score requirements and voluminous financial reporting requirements. However, most alternative lenders do not provide loans and what they do provide is nothing like a loan. The implications of what can happen to you can be brutal. This article provides a simple overview of "MCA Loans" and what you should really know.
By Thomas Tramaglini, Chief Operations Officer
The "MCA Loan"... What is a Merchant Cash Advance (MCA)?
An MCA is not a loan but an advance of a business’ future receivables.
A simple explanation:
A small business owner sells a specified amount of their future sales to a company (predatory alternative lender). That company, agrees to pay the small business owner(s) a discounted amount (up to 50%+ less than what the future sales are sold for).
So, in context, say you sell $100,000 of future sales to an alternative lender and they give you $50,000 that day. Basically, you took $50,000 and agreed to send $100,000 to the buyer (alternative lender) over the next few months.
And, that is a merchant cash advance (MCA) or what most small business owners think is a loan.
An MCA ("MCA Loan") is not a loan and therefore you/your business are not afforded the protections required for banks and lenders who offer loans.
Interest and Terms
MCAs do not accrue interest. Instead, advances have factor rates, also known as buy rates, which represent an agreement on how much of a small business's future sales will be paid to the lender. Some advances may require repayment by taking a portion of the business's daily credit card receipts until the agreed sale of future receivables is fulfilled. The frequency of MCA payback varies based on risk and bank account statistics. For example, if a borrower prefers monthly or weekly payments, the lender assesses this option based on the average daily balance in the business's bank account. If daily balances are inconsistent or lower, MCA lenders might require daily payments.
The most significant downside of an MCA is the cost of money. MCAs can be expensive, with payback amounts reaching up to +50%. Additionally, most advances include origination fees for the lender's work, which can be as high as 10% of the loan. The cost of money for MCAs is similar to how credit card cash advances operate and, in some cases, may be more favorable.
So Called Advantages of MCAs
Merchant cash advances offer several benefits for small business owners, including:
Quick funding – Some MCA providers can deliver funds to small businesses within 90 minutes.
Most MCAs do not involve UCC liens.
MCAs are typically not reflected on personal credit reports.
The funds are unsecured.
Payment schedules can sometimes be flexible.
Most MCAs do not require a personal guarantee.
Easy refinancing options can help reduce costs.
No penalties for early repayment.
Small business owners can establish a relationship with the lender, potentially leading to better terms.
Minimal documentation (including taxes) is needed for funding.
Is an MCA Suitable for Your Business? Proceed with EXTREME Caution
This article discusses the necessity and use of Merchant Cash Advances (MCAs) for small business owners. While MCAs can support a small business and foster growth, they should be approached with caution. Business owners need to understand the terms, repayment conditions, and associated profit margins.
Most Small Business Owners Discover the Details Too Late
In 2020, the FBI targeted the infamous MCA lender PAR Funding, a major player in the Reverse Consolidation MCA market. The SEC reported a default rate of about 50% among those who took Merchant Cash Advances from PAR.
This means that 1 in every 2 small business owners defaulted on their MCAs. Our analysis suggests a slightly lower figure, at 41%. This is a staggering number, even more alarming than what a gambling operation would consider funding.
From our experience, the crucial aspect of any client's MCA portfolio is the details within the MCA. MCAs typically demand a personal guarantee of performance and require adherence to strict repayment guidelines, with consequences such as lawsuits or UCC freezes, which can be more severe than lawsuits.
The Bottom Line: Be Informed
The most crucial step when taking a merchant cash advance is to understand what you are dealing with. Know your lender, identify which lenders collaborate effectively with clients, and proceed from there. Read your contract or agreement, understand the terms, and be aware of the potential consequences of defaulting.
Contact Beacon Client Solutions to better understand your situation and how we can help you.
Dr. Thomas Tramaglini is the Director of Operations and Negotiation for Beacon Client Solutions, a company that supports small businesses on a host of fronts, especially MCA debt. Thomas has been a small business owner for many years, as well as held leadership positions in several organizations and companies. Thomas holds a B.A. in History, as well as Masters and Doctorates in Organizational Leadership from Rutgers University, The State University of New Jersey.
Disclaimer: Beacon Client Solutions is not an accountancy, or a law firm. We are business consultants. While Beacon works with outstanding attorneys and accountants, we cannot and do not provide legal or tax advice. All of our work is connected to those who are legally certified to give such advise. Beacon does have a longstanding body of work in MCA resolution and understands what small business owners deal with, specific to MCA. Beacon Client Solutions serves clients in all 50 states, Puerto Rico, Mexico and Canada.
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