It is very difficult for small businesses to get inexpensive working capital that has a reasonable term to pay back the money that is borrowed. So, Merchant Cash Advances (MCA) present small business owners with a fast, easy way to get funded. And, perhaps the most widely used and pushed sales gimmick that MCA/loan companies and brokers use on small business owners is that working capital will help you grow your business.
However, do Merchant Cash Advances really help most small business owners grow their businesses? In this article we explore this topic and discuss the implications of attempting to take funds via MCA to “grow” your business.
By Thomas Tramaglini, Chief Operations Officer
Partner, The Center for MCA Research
The want and need for working capital through Merchant Cash Advance to ‘grow’ your business.
Small business owners need money to grow their businesses. However, it is nearly impossible for small businesses to attain funding from any source that has reasonable, low-cost payback. The data are clear: for instance, in 2021, the US Small Business Administration (SBA) reported that there were over 32 million small businesses registered in the United States. The SBA also reported about 12,000 SBA 7A loans being delivered, suggesting that only 0.000375 businesses were able to attain SBA funding that year.
Because it is easier to get struck by lightning than it is to get a small business loan from a bank/SBA loan, small business owners turn to Merchant Cash Advances. With high approval rates and few stipulations for funding, small business owners have a place to access working capital fast, without many barriers to overcome. Most MCA companies say that they can deliver funds in hours, which is usually true.
And when sales brokers or agents pitch small business owners, almost all of the time they promise that the funds will help the small business owner grow their business.
We are not lying: How MCA companies promote the BIG LIE to small businesses.
As we suggest, the industry wide snake oil sold to small business owners is that by taking on a Merchant Cash Advance, you can grow your business or take your business to the next level.
Just about every MCA company promotes the Big Lie. And to make our point, here are some examples of some of the biggest MCA companies who sell this nonsense to small business owners. Further, these companies (minus On Deck) are some of the most litigious MCA companies there are (see article on how many lawsuits these predators file).
On Deck
"Grow your business on your own terms."
CFG Merchant Solutions
"Quick access to working capital, grow your business today with CFGMS."
LCF (Last Chance Funding)
"Get quick and hassle-free small business funding...Trust LCF to provide the financing you need to take your small business to the next level."
Arsenal Funding
"We at Arsenal Funding understand the challenges small businesses find themselves in and provide solutions to help businesses grow and resolve financial issues big or small."
Little data to measure business growth using MCA.
At the Center for Merchant Cash Advance Research, we collect and analyze data that describes the MCA industry. Overall, there is no data available to researchers which allows us to empirically test whether MCAs actually help businesses grow. Given the right situation, with the right margins of profit, we believe that yes, working capital may help businesses grow.
Yet, we also believe that these examples are a small fraction of what really does happen. In fact, with the high number of defaults, there is likely no way that MCAs can help businesses grow. In fact, the likelihood of businesses failing seems to be much higher.
Do Merchant Cash Advances help businesses grow?
In theory, the idea of taking money to make money is a good idea. MCA companies highlight fast funding, with little underwriting, few stipulations, and seldom and barriers.
However, when this idea is nested in something that kills growth, it’s a different story. Most cash advances have payback which is around 50% or more of what was sold to the MCA company.
Compared to Merchant Cash Advance cost: 40% to 60% payback rate, if you are in one of these industries you have a good chance of not only not growing your business but defaulting and destroying your business.
Advertising – 26.2%
Apparel – 53.04%
Construction/Engineering: 13.45%
Hospitals/Healthcare: 36.78%
Real Estate (development): 28.92%
Retail (general): 24.32%
Retail (online): 41.54%
Software (internet): 61.0%
Trucking: 3%-9%
Default rates are assumed to be 600% higher than bank loans.
With such wide gaps between profit margins and the amount of money that MCA companies ask the small business owner to pay back beyond what they received; it can be suggested that few small businesses can actually grow using MCAs. For instance, if Real Estate developers are paying back 50% on the MCA and their profit is only 28%, they are likely putting themselves in a bad place without even knowing it.
This is one major reason for why MCA default rates are so high. One report suggests that this number is nearly 600% higher than bank loans. During the famous PAR funding case, the US Department of Justice reported that default rates were over 50%.
Regardless of the Merchant Cash Advance company, defaults are always high. So, it is easy to see that with the high cost of MCA and the damage they do to profit margins, MCAs are not helping but hurting businesses.
A simple idea: Ask for data to support their pitch.
Here is a simple idea. When MCA companies tell you their funds will help you grow your business, ask them to provide you with some data where they have demonstrated this concept. They will not be able to because they do not have any.
Little is known about the effects of Cash Advances, other than the havoc that it wreaks on the lives of thousands.
The next steps….
Have you taken a Merchant Cash Advance and failed to meet the harsh expectations of what has been delivered to you?
The consultants at Beacon Client Solutions seek clients who are in the pitfall of litigation. Beacon will protect you and your company from the harshness of litigation and work with you and the creditors to successfully move through your lawsuit(s) and return your business to good standing.
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. He is also a partner for the Center for MCA Research, which aims to better understand the MCA industry and the patters of MCA companies, so it can better inform small business owners and policy makers about an industry which has little empirical understanding.
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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