Who should NOT use them?

It’s a rough way to start the day. 

You are a restaurant owner and sales have been inconsistent lately. Your power bill is past due, and you must pay it today, or the utility will disconnect your electricity for nonpayment. Last night when you checked, you had sales transactions that were ready to post overnight, so fortunately, you can pay that bill.

Or so you thought.

Unfortunately, the MCA lender auto-debited your daily payment from your account before you could pay the electric bill. Now you can’t pay it. 

Your doors open in two hours. The last things you need are the embarrassment, hassle, and financial losses that come with getting your power disconnected while your restaurant is busy with customers and employees.

Think twice before taking that quick cash.

MCA repayments are a hand that intercepts your money before it gets to your bank account, every day.

Merchant Cash Advances (MCA)s are a source of financial and operational trouble for countless small business owners daily. The MCA lender debits daily payments from you regardless of your payroll, your taxes, your lease, your goods, or any other critical expense. The MCA lender takes its payment first and takes it every day.

Based on countless horror stories from other businesses across the country, here is why you should not use a merchant cash advance (MCA)

MCAs are not ideal for businesses with uneven cash flow or unreliable revenue. Businesses that find themselves with regular fixed expenses but without regular sales should not use MCAs.

Remember that “seasonal” is not the same as “unreliable”. Seasonal business is reasonably predictable. If you operate a summer rental business, you can predict and prepare for a busy season between late May and early September. However, unreliable revenue results from poor marketing or economic events beyond your control.

In that case, an MCA does more harm than good.

Why you should not use a MCA

• Very High Costs: MCAs are not loans but purchases of future revenue, resulting in high factor rates (typically 1.2–1.5x) which translate to very high APRs.
• High Pressure on Cash Flow: Daily or weekly automatic deductions can significantly drain cash flow and reduce working capital. This may be the biggest reason why you should not use a merchant cash advance (MCA).
• Limited Regulation: The industry is largely unregulated. It lacks the consumer protections and transparency of bank loans.
• No Benefit to Early Repayment: You pay the same fee regardless of how fast you pay it back. Additionally, some contracts do not allow for early repayment.
• Debt Trap Cycle: The high cost and quick repayment cycle can force businesses into a cycle of taking new advances to repay old ones. 
• Difficulty of refinancing: An MCA shows up as daily automatic debits on a bank statement and as a liability on a balance sheet. That often results in bank loan denials due to insufficient debt service coverage (DSC). Even if the stated purpose of a bank loan is to pay off an MCA, bank underwriting guidelines forbid loans that do not meet sufficient DSC. 

Key Considerations

• Not a Loan: Because they are classified as a sale of future receivables, legal protections in some jurisdictions may not help you.
• Watch for Fees: In addition to the factor rate, some providers charge high origination or administrative fees.
• Repayment Structure: Funds are repaid by taking a percentage of daily or weekly credit card sales. That’s right. Your account is autodebited daily. Daily. Or Weekly. That is a major reason why MCAs are more appropriate for a business with predictable sales. Businesses with uneven cash flow can run into trouble with MCAs. 
• High Costs: MCAs often come with high fees. Factor rates generally range between 1.20 and 1.50. In other words, a factor rate of 1.20 means that a $10,000 advance to you means that you pay back $12,000. or 120 percent of the amount you received.
• Repayment period: MCA companies want their money back fast. Normal repayment periods range from 3 to 18 months. The average duration is 6 to 9 months. 
• Alternatives: If you need to borrow, use a comparison shopping platform. 

MCAs can be useful, and can provide a financial lifeline in an emergency. But they are not a suitable solution for many businesses.

If you have credit issues but regular revenues and are in a position to pay back an advance quickly, an MCA could provide a financial bridge. It is a toll bridge, but if it can make future operations or expansion possible, you should consider it.

One Click Advisor offers many choices for small business funding, and those include MCAs. See what your options are today.

If you have questions or doubts about your financing options, just ask. Click here, set up a call, and we will answer your questions. 

Whether it is an MCA or any other financing, we encourage you to enter any transaction as knowledgeable as possible.

For additional information, please see Part 1 and Part 3 of our series, The lowdown on Merchant Cash Advances (MCAs).