Merchant Cash Advance Loan
What are Merchant Cash Advances (MCA)?
A merchant cash advance (MCA) is a type of business financing where a business receives a lump sum of money upfront in exchange for a percentage of its future credit and debit card sales. The amount you typically qualify for is based on how much money your business is bringing in per month. Here's how it works:
- Funding: The business receives a lump sum from the MCA provider, in either a single or multiple installments.
- Repayment: The business repays the advance by allowing the provider to take a portion of its daily credit and debit card sales. This money is collected every day (during the business week), until it is paid back in full, with interest.
- Flexibility: Repayment amounts can vary based on the business's sales, which can be helpful during slower periods.
- Cost: MCAs can be quite expensive, with effective annual interest rates often ranging from 30% to 950%.
MCAs are typically used by businesses that need quick access to capital and have a high volume of credit card transactions. However, due to their high costs, it's important for businesses to consider other financing options before opting for an MCA.
Merchant Cash Advances (“MCA”), do offer an alternative method of short-term financing for cash-strapped small businesses who need a quick source of funds and may not qualify for a bank loan. MCA loans are not based on your credit, it’s based on how much money that your company brings in each month. MCA companies provide funds to struggling businesses in exchange for a percentage of the businesses’ revenue, which typically are repaid through daily withdrawals from the business’s bank accounts.
Merchant cash advance (MCA) companies, often likened to payday lenders for businesses, typically utilize aggressive sales tactics to lure unsuspecting small business owners into signing binding contracts that can lead to severe financial distress. These adhesion contracts are heavily skewed in favor of the lender, with default terms so stringent that businesses are almost guaranteed to default before considering bankruptcy protections. The contracts include broad security pledges, encumbering all assets and potential revenue streams, granting the lender unrestricted access to the borrower's bank accounts to monitor financial conditions, and mandatory personal guarantees for both performance and payment that can be enforced at any time.
MCA companies operate through a network of independent sales organizations (ISOs), which obtain leads from online paid lead generators. These websites claim to connect consumers with reputable lenders. ISOs receive commissions or referral fees from the funding proceeds paid by the borrower.
More companies have been turning to the factoring industry for short-term financing solutions. Factoring fees are more in line with the same fees that you would pay to a credit card company. Unlike an MCA, factoring is not a loan, you are not taking on any new debt. Factoring is when you sell your invoices at a discounted rate for immediate cash. To find out more or to if you would like to take the first step, please complete our non-binding factoring application here.
New laws are being passed to stop this type of predatory lending, to read more about this please go here.
HOW INVOICE FACTORING WORKS
