Small business owners are often vulnerable targets for alternative loan brokers who frequently make unfulfilled promises without facing any consequences for the harm they inflict. Many clients have shared stories of being assured that they would secure term funding, lines of credit, and other financial products by simply "building some history."
We have highlighted how small business owners have been deceived by merchant cash advance brokers in the "Baloney Playbook." In Baloney Playbook, we underscore how brokers of alternative loans and merchant cash advances are predatory individuals who entrap small business owners in crippling debt through a playbook of deceit. Once they ensnare the business owners, they stop at nothing until the owners are buried in insurmountable debt, leading to legal issues, liens, and financial ruin.
At Beacon Client Solutions, we actively combat the predatory tactics employed by brokers of alternative loans and merchant cash advances. This article discusses some of the common strategies used by these brokers, their consequences, and our efforts to push back against them.
By Thomas Tramaglini, Chief Operations Officer
The Center for MCA Research
The Broker Scheme.
Irrespective of the broker, we observe common strategies employed by brokers on a daily basis to entice small business owners into opting for alternative loans and cash advances. Therefore, we have compiled a list of tactics that we have incorporated in our efforts against the MCA industry, with the goal of safeguarding small business owners from these exploitative methods. We refer to these strategies as the "baloney playbook," although you may use different terms interchangeably.
1. We prioritize you and your business.
Small business owners are often misled into believing that MCA brokers have their best interests at heart. However, the truth is that MCA brokers are solely focused on their own financial gain. When MCA brokers express disappointment because you sought out other options, or try to convince you of their sincerity, remember that their primary motivation is self-serving and not in your favor.
2. By obtaining a shorter advance, we can provide you with a term loan or line of credit.
Brokers often promise the possibility of securing a longer-term loan or a line of credit by first opting for a cash advance. However, in reality, Merchant Cash Advance companies do not provide such extended financial solutions as part of their services.
If you find yourself ineligible for an SBA loan or a long-term loan, it is often due to factors beyond your control. It is crucial to understand that obtaining a loan or line of credit does not require accepting a cash advance beforehand.
Brokers might employ various tactics to persuade you to accept the funding to ensure their compensation.
3. Brokers present an enticing picture of the world as a "great opportunity."
Irrespective of the potential client, in order to persuade a business owner to opt for a merchant cash advance, brokers will make grand promises, creating an illusion of a path leading to the desired outcome for the client.
The challenge lies in the fact that the majority of small business owners will not actually reach the desired goal.
Most small business owners require a lengthy business history, along with various specific qualifications, to secure a loan from a bank or the SBA. Banks typically demand collateral for loan security, as well as financial documents and tax records showing consistent profitability over the years. Banks essentially seek a low-risk scenario before approving loans.
We estimate that less than .001% of small businesses in the country are eligible for a bank loan. Regardless of the exact percentage, it is evident that the process is extremely challenging.
Therefore, brokers will present an enticing offer. They will depict the loan or advance as a great opportunity. However, it's important to remember that if the repayment amounts to 30 cents or more on the dollar, it is never a favorable deal.
4. You need to build history.
One common strategy used by brokers when dealing with small business owners is emphasizing the importance of building a history to secure a better deal. This is a tactic employed by brokers to encourage small business owners to opt for a high-interest Merchant Cash Advance (MCA).
Merchant Cash Advance (MCA) companies are not concerned with a business's history. They operate based on predetermined criteria (such as duration, rates, etc.). Therefore, while taking on one or more MCAs may establish a history with a funder, both the MCA company and the broker stand to profit significantly from the arrangement. The greater the discount offered on the deal, the lower their profits, which is unlikely to occur.
So, building history will never give you more than just more advances.
5. We are direct lenders, so you get a better deal.
Brokers and MCA companies do not directly lend money. MCA companies function as purchasers of future receivables, relying on your bank statements to ensure repayment and quick returns for their investors. The primary goal is to maximize profits from the business owner.
Brokers act as intermediaries aiming to profit from small business owners. Cutting out brokers can be a lengthy process, and finding an MCA company with lower charges is challenging. Even if such a company is found, high fees, such as 25% or more, may not be beneficial for your business. Only a few industries have the profit margins necessary to benefit from MCAs.
6. We will help you build your business credit.
Business credit refers to a business's capacity to settle bills, similar to personal credit. As a result, business owners strive to avoid providing a personal guarantee for the funds they receive and aspire to access superior lending options for their business. Consequently, when small business owners learn that they can establish their business credit through a merchant cash advance, it resonates with them.
Several Merchant Cash Advance and alternative loan companies have made attempts to report to credit bureaus over the years, but they have faced challenges and often failed to follow through for various reasons.
For a Merchant Cash Advance or alternative loan company to report to a business credit bureau, they must possess the necessary technology and meet the credit bureaus' required volume thresholds. For example, Dun and Bradstreet, a highly regarded business credit bureau, mandates a minimum of 500 monthly submissions to report client history. Similarly, Experian and Equifax have their own volume criteria. However, only a few MCA companies have the scale required by entities like Dun and Bradstreet.
Moreover, each organization stipulates the need for specific software to report to their bureaus, a capability that most MCA companies lack. It is important to note that these companies are not banks and are unlikely to make substantial investments in reporting to business credit bureaus.
Lastly, there is a financial cost associated with reporting to credit bureaus. The majority of MCA companies do not perceive a long-term relationship with their clients, who typically engage with MCAs for short periods, making the investment seem unwarranted.
7. We can get you more money if you need it by stacking (taking more than one advance).
When small business owners require funding that exceeds their qualification, brokers resort to stacking.
Stacking involves brokers providing multiple cash advances to a single small business owner within a short period after each MCA. Brokers execute stacking with precision, ensuring that the business owners understand the need for discretion to prevent MCA companies from detecting multiple advances. Due to the swift funding process compared to banks, unless there is a significant delay between fundings, it is challenging for MCA companies to identify stacking unless disclosed by the business owner during the funding call.
We have extensively covered the concept of stacking and its implications for small business owners.
Stacking should never be considered as a viable option for small business owners under any circumstances.
One merchant cash advance is never enough.
Keep in mind that when you sign up for an MCA through a broker, you become part of their clientele. This implies that they will persist in seeking to refinance your existing MCA or offer you additional MCAs.
Essentially, their objective is to increase their profits, and you are already marked as a potential customer. Having just one MCA is not sufficient in their eyes.
The dumb brokers put things in writing. Ask for it. Save it.
Many brokers lack intelligence. They will contact you through text, email, and messages, providing you with material that can be used against them in the future.
Keep a record of everything.
We have a track record of holding brokers accountable for their dishonesty and absurdity. We have even collaborated with MCA companies who share our disdain for these false ideas.
If you have fallen victim to the behaviors described above, please save the proof and inform us. We are here to assist you. You might still be bound by your cash advance agreement, but you will have the means to fight back in the end.
So What?
The team at Beacon Client Solutions regularly works with clients who have been taken advantage of by MCA companies. Specifically, those business owners who have been burned.
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 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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