Merchant cash advance (MCA) brokers can make and break small businesses. That is, MCA brokers can get funding for small business owners and make a lot of money in commissions and at the same time, put the small business owner in such a predicament that they will never be able to pay their MCAs back leading to potential lawsuits, judgments, and other harmful outcomes. This article sheds light on some of the things that MCA brokers do which are harmful to businesses and small business owners.
By Thomas Tramaglini, Chief Operations Officer
What is an MCA Broker?
An MCA broker is a predator. Defined: A predator is a person who ruthlessly exploits others.
Most small business owners who have taken one or more Merchant Cash Advances (MCA) have worked with a commercial broker who has helped him/her access funding. MCA brokers are sales associates who call/text/email small business owners offering funding. Brokers are not licensed sales associates and are usually paid on commission only.
From experience, most small business owners will agree that brokers are nothing more
than predators, who will ruthlessly do what it takes to sell you more debt through merchant cash advances.
Beacon: The only small business support company who holds brokers accountable.
We work with small business owners regularly to address MCA debt which has reached levels where the small business cannot pay back their MCA(s). When onboarding our clients, we explore how brokers have contributed to the small business owners’ debt issues. We usually find occurrences where brokers conducted themselves unethically or at a minimum in a way that the MCA company had no idea of what was happening.
When working with our clients, if we have found unethical practices, we work with our attorneys to ensure that as part of the process of working to resolve debt, the broker is also held accountable. That includes in some cases bring legal action against the brokerage for their tactics which were outlawed by the MCA company or illegal.
How Brokers are Paid is Important.
Although most small business owners could care less for how MCA brokers are paid, it is important for any small business owner to understand how most MCA brokers are paid. Usually, unless a small salary or draw supplements a broker’s income, brokers are paid a percentage of the overall funding amount. Most MCA companies allow brokers to upsell their advances upwards of 10% and with some MCA Companies (for instance Everest, Bitty) may allow upselling to 20%. So, if a Merchant Cash Advance is funded at a 35% factor rate (which most business owners think is interest but it’s not), brokers add on their piece and MCAs then are priced out at 50% factor rate or more.
Why is this important?
Because the more money they can charge, the more money they can make.
What is also important is to know that in most cases the broker works for a brokerage (MCA broker shop), so they are only being paid a smaller percentage of what the brokerage makes. So, unless the broker is charging a large upsell amount, they are not getting paid.
Brokers will go to any means to get a deal funded.
Brokers tend to build relationships with their clients and in some cases, they take advantage of the relationship. For instance, we have seen many times where brokers have done things such as withhold information from the MCA company or falsify bank statements or tax returns to ensure a certain level of funding. During PPP and EIDL we saw at least one fraudulent 940/941 per day coming in from brokers who wanted to fund their clients.
So, the main point is that brokers will find ways to get things done with whatever way they can get it done.
Perhaps some of the following things are what may have happened to you in your experience(s) with Merchant Cash Advances. Regardless, I encourage you to consider working with us on your debt eradication and let us provide an ethical way of holding MCA companies and brokers accountable for their actions.
Things That MCA Brokers Do That Are Bad.
The Promise the World. And More.
Brokers can be bigtime liars.
That is, they will do anything they can to get you to take a merchant cash advance. From our experience, small business owners ask brokers for lower interest loans with longer terms or lines of credit. Most small business owners can never attain such funding.
So, brokers package lower interest rates, longer terms, and lines of credit by lying to the small business owner. While there are a bunch of different schemes, here are a few that are used which may be familiar:
Take this advance, and every 3 months you can renew the advance, like it is a line of credit.
Each time you renew the program, you will get a longer term and lower interest rate.
Since you have no history with programs like this or the lender, you should take this advance and build some history. Then, you will get a longer term and a lower interest rate.
There are many others…
Frankly, most small business owners know they need the funding and the broker knows it. Ultimately, the small business owner who asks for lower interest, longer term, and more will take what they are given, regardless of the terms which they are given. Once the broker gets past the small business owner’s initial objections, the broker will come up with something they can say that helps the client get over the finish line.
What Brokers Do Not Want You to Know About.
MCA brokers are magicians who cover up who and what they really are: Predators looking to take advantage of so they can make money. Brokers do not want you to know that they make commission from you and that they certainly do not want you to know that they are a broker. They want you to think they are the lender, with a direct line to funds for your business without reservation.
Brokers want you to believe that they work for the lender or MCA company. They want you to believe that they are connected to a network of outstanding underwriters or have control over your deal. Realistically, they have little control over what happens to the deal and you.
The language of the broker also uses specific language indicating that they are a broker.
Brokers avoid saying the following:
I am a broker.
We are not a direct lender.
Personal Guarantees.
Merchant Cash Advance.
Your Business Comes First.
Brokers have less regulation than the non-regulated Merchant Cash Advance companies.
Because MCA companies provide advances, that is they purchase a small business’ future receivables, they do not fall under loans, therefore these companies do not fall under government regulation or oversight. MCA brokers have much less oversight. There is no regulation or oversight in any way.
To become an MCA brokerage, all you have to do is form a company and sign up with MCA companies. Most MCA companies do not require much more than an ISO application and hungry MCA ISO reps would like more deals so why not have more companies submitting deals. Overall, the biggest point that I make is that small business owners who work with brokers should take note that there are no ethical
standards or standards at all that brokers need to follow.
That is never, ever good for the small business owner and it usually means that the brokers will do anything they can to get a deal funded.
Clawbacks…
Most brokers are not educated and lack the foresight necessary to watch out for the small business owner. So, without any reservation brokers will try a bunch of different tactics to try to get the small business owner closest to what is requested and never think of the consequences.
The only thing that a broker is concerned about is the clawback. The clawback is a term used that describes when a client defaults or misses payments after funding within a period of time, usually 30 days from funding. If the client has issues within the clawback period, the broker will have his or her commission recovered.
So, to make it to the clawback period, brokers will string along the business owner, add more funding, or do whatever they can to make sure that they get paid. Little ever goes into consideration for the small business owner.
Brokers will kill your credit.
When a merchant cash advance broker gets your business bank statements and your application, brokers or the brokerage will screen your information and send your file to any number of merchant cash advance companies.
When MCA companies get your application, they will usually do a hard pull on your credit, or in some cases a soft pull.
Brokers will always tell you that there is no effect on your credit for applying but take note: The majority of MCA companies do a hard pull on your credit and even if there is a soft pull, others will know about it. For instance, most MCA companies use databases from clearinghouses such as CLEAR to screen potential issues with small business owners before funding. So, once you are offered an initial advance and accept it, the MCA company may already know all about you, from your credit history, criminal history, as well as who has done a soft and hard pull against you.
The biggest note is that because brokers do that, broker your deal to the MCA companies, they are not accountable and did not do any credit review. Ultimately, any MCA broker will have a detrimental impact on any small business owner’s credit.
Renewals
Once a small business owner is a client of the broker, brokers will try to get the small business owner to renew their MCA halfway through their payments. This gives the small business owner more money as long as they have paid their advances accordingly.
Why renewals are bad is because you are basically resetting the advance, paying interest on interest, and almost always getting a similar or higher rate and similar term. Renewals are not good deals for the client and brokers love them because they get paid on another deal within a few months of the initial funding.
Stacking
In the Merchant Cash Industry, the term “stacking” is used to describe when a business takes out multiple cash advances at the same time or adds another MCA after the small business owner has received an MCA. MCA companies and anyone in the industry refers to each MCA or loan (if there is a loan in the portfolio) as a position. Therefore, when a business has a Merchant Cash Advance and wants another one, it is considered a second position to the first MCA or loan. Each additional MCA is considered another position.
Small Business Owners and Brokers turn to stacking when the MCA companies are not able to provide enough cash upon the MCA company’s offer. For instance, if a broker were to submit three months of business bank statements to an MCA company, and based on the small business’s revenue the MCA company offers to buy $35,000 of future receivables and the small business owner needs $50,000, the small business owner may take an additional MCA for $15,000 to arrive at the amount needed.
Hence, this “stacking” is a way to arrive at a higher amount of money. And, while stacking can be complicated and discouraged by the MCA company, brokers LOVE stacking because the more money that a small business owner takes, the more the broker makes. Any decent broker can stack positions for a small business owner using some easy and simple coordination. We call this the art of stacking, and brokers are skilled in adding positions to client’s portfolio all the time.
However, when a small business owner stacks MCA positions, it’s usually a bad move and leads to default.
Consolidations
Brokers who see stacked small business owners will seek consolidation of the Advances into one payment, but most small business owners do not qualify for consolidation. Regardless, consolidation, if it happens is just a fancy way of the small business owner paying more to the MCA companies. For instance, an MCA provider decides to consolidate 2 payments into 1 advance. Nearly every MCA consolidation program also requires the borrower to net 50% or more of the funds they are consolidating. This means that the client doubles their debt.
It is not clear how consolidating to double your debt helps anyone, but we see it as certainly not good for any small business owner.
Having a hard time with your advance? Take another one.
Perhaps one of the most prevalent strategies that brokers use for when a client they funded has difficulty making their payments to the MCA company is to take on more debt so the small business owner can make their payments.
However, this strategy makes no sense and just kicks the can down the road, making the hole the small business owner is in deeper.
The only one who benefits from this happening is the broker, who makes more money.
Additional Service Fees
Some brokers charge a service fee on top of their high percentage commission. This fee is called a number of things but is essentially a commission on the commission. MCA companies traditionally do not want to see brokers charge additional fees because it means less that the small business owner will have that in his or her bank account to pay back the advance.
However, these fees are not-recoverable usually and it’s just a broker ripping off the small business owner. If you are a small business owner and you are being charged an extra fee, you are probably being pushed closer to default.
Regulation of MCA companies and disclosure really does not do justice.
In recent months, several states have incorporated disclosure laws which require all fees for any transaction, such as a merchant cash advance to be disclosed to the client. While this is a step in the right direction, the bottom line is that small business owners, regardless of how much they are being gouged by the MCA company for funding still need the funds. Because banks and the government have made it so hard for small businesses to receive funds, few small business owners will ever not take funds because of how much the money costs or what goes into that cost. MCA companies will scheme around these disclosure laws which are not the real issue.
Brokers Need Oversight and Regulation
Not to diminish the shenanigans that some MCA companies play and the need to regulate their operations, MCA brokers are for the most part never helpful. Their compensation structure is detrimental to small business owners and once a small business owner starts taking MCAs, it’s usually bad for business. However, for brokers it’s good for business.
MCA brokers need to be regulated, and so do MCA companies. Regardless of the consumer protection laws forcing MCA companies to disclose funding specifics (such as commissions), as outlined, brokers have a bunch of different tactics which they use that are not good for business owners.
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 Master’s 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 our work is connected to those who are legally certified to give such advice. 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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