Working capital loans and Merchant Cash Advances (MCAs) are important to small business owners need funds to operate or expand their businesses. However, many small business owners are not aware of the dangers of taking on such loans and advances. In many cases, brokers and lenders are predatory in their actions leading to negative outcomes by businesses. In this article, we describe in some depth merchant cash advances. We also provide some implications and offer lower cost avenues to borrowing money for small businesses.
By Thomas Tramaglini, Chief Operations Officer
Lack of Lower-Cost Options for Small Businesses
In recent articles I have provided an overview of the lower-cost options available for small businesses. Loans such as SBA loans are rare. For instance, in 2021 there were over 32 million small businesses in the United States and only a little over 12,000 SBA loans funded in the same year. That means, that the funding rate to small business is 0.00038%. That comes down to about 1 in 37,000 chance a small business would get an SBA loan. These are not good odds for the typical small business owner, unless you are comparing to getting struck by lightning (1/114,195) or dying in an airplane crash (1/205,552).
Barriers in Place Make Sure Small Businesses
Overall, small businesses asking to borrow money present high risk to banks. Most banks do not want to lend to small businesses because about 1 in 6 small business owners (Voigt & Campbell, 2017). So, for banks to get to the place where they feel comfortable, they ask for and analyze every piece of paperwork they can. Banks also use terms such as Global Cash Flow (which most business owners cannot determine) and require full financials (which most small business owners do not have).
In short, it is my perspective that unless a small business has millions in accounts receivable or years of showing profits of 6-figures, the likelihood of getting a small business loan is grim.
The Devil is in the Details
According to the SBA data from the 7a lending report, in 2021 SBA loans totaled around $6.3 Billion. In comparison, the MCA industry alone (Rumore, 2021) totals around $19 Billion per year. Therefore, MCA dollars are about 3 times more prevalent in lending than SBA 7a loans.
Alternative Loans or Online Loans
Because it is so difficult for small business owners to get a small business loan at a bank (see This Blog Post for Data), there are options that present a much easier route. One such option are alternative loans or online loans from lenders who offer much shorter terms (6 months to 5 years). There are many advantages to these loans (time, less paperwork, fast approvals) and you can learn more about or apply with the options listed here. It is important that if you want to apply for a term loan or line of credit with one of these lenders you speak with someone who has knowledge of these products. Although the approval process is relatively fast, these lenders will still ask for financials, taxes, and other documents. Further, you can assume you will receive a hard pull on your credit and in some instances, they will ask to secure your loan. Our team of advisors has the knowledge of the different programs out there, can explain your options, and will prevent your application from getting shopped around the internet which will hit your credit negatively.
The Merchant Cash Advance
A Merchant Cash Advance (MCA) is one of the easiest funding options for small business owners because MCAs are unsecured, do not require strong credit, usually do not require collateral, and also require little documentation (if any). The average MCA file can be funded within a day and usually requires several months of business bank statements. An MCA is not a loan but an advance of a business’ future receivables. Lenders gauge how much to advance a small business owner in several ways, including previous credit card sales and revenue going into their business bank account. Variables such as industry, number of deposits, daily balances among others are used by the lender to hedge risk. Regardless, MCA lenders offer to advance a portion of a small business’ future sales as well as an agreement with the business owner on the percentage of future sales which are being sold to the lender.
Interest and Terms
MCAs do not carry interest. Advances carry factor rates, which are also called buy rates that are simply an agreement of how much of a small business’ future sales will be paid to the lender. Some advances may also collect repayment terms by taking a portion of business’ credit card receipts each day as well until their agreed sale of future receivables is completed. MCA payback frequency varies depending on the risk and bank account statistics. For instance, if a borrower wants to have a monthly or weekly payment the lender gauges that opportunity off the average daily balance of the business in the business bank account. When daily balances are variable or lower MCA lenders may require a daily payment.
Probably the most negative part of an MCA is cost of money. MCAs can be expensive. That is, MCAs can be as high as +50% in payback. Also, most advances carry origination fees for the work by the lender, which can be as high as 10% of the loan. MCA cost of money is like how credit card cash advances operate and, in some cases, better.
Advantages of MCAs
Merchant cash advances have several advantages for small business owners, and some can include:
Fast funding – Some MCA companies can fund small businesses in 90 minutes.
Most MCAs do not have UCC liens
MCAs are not usually reported on personal credit
Funds are unsecured
Payment frequency can be flexible at times
Most MCAs do not carry a personal guarantee
Easily refinance options which can cut costs
No early payback penalties
Small business owners can build a relationship with the lender ultimately securing better programing
Few required documents (including taxes) for funding
IMPORTANT – Speak to Someone with Expertise and Who Cares (without obligation or cost)
It is imperative to speak with someone who is impartial when it comes to your borrowing options. MCA brokers make money off of your MCA (Points added for MCA brokers to the buy rate and in turn the sell rate is 10-20% higher than the buy rate). Many of the rip-off and illegal collection activities of lenders have been exposed and prosecuted in recent years as well (SEC and FTC have become more involved in holding some lenders such as Quarterspot, Yellowstone Capital, and RAM Capital.
That said, you should speak to someone that knows about the different options and importantly, tells you what they believe you can be approved for and WHY! This includes should include SBA and USDA to MCA options.
Up front, I believe that phone sales can be very valuable, if the person calling you is ethical and follows the rules of calling.
However, if you are called and asked the following it is probably an MCA broker and you should think twice before engaging in their questions.
Common MCA Broker Script:
What industry are you in?
What is your average revenue?
How many deposits do you make a month?
How many years have you been in business?
How many positions do you currently have?
What is your credit score?
Do you have any bankruptcies or judgments?
When you get a caller who asks you these questions, think twice about it. Brokers can be good, but many can be bad. They charge nearly 15% on your MCA if they can and will run you and your business into the ground.
Did you take a MCA and are you having a hard time paying? Defaulting?
Contact our team immediately and we will customize a plan for you that addresses your issues.
References (Rumore, 2021) https://businessdebtlawgroup.com/state-of-merchant-cash-advance-during-coronavirus-pandemic/ (Voigt & Campbell, 2017) https://www.nerdwallet.com/article/small-business/study-1-in-6-sba-small-business-administration-loans-fail
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 advise. 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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