A Merchant Cash Advance: Scam? Or a Good Way to Get Cash Fast?

 

You’ve probably heard about merchant cash advances. These are financing options provided in one or two business days to business owners that don’t possess outstanding credit.

There are upsides and downsides to MCAs. One upside is that a business can get access to cash fast, with clear terms, for a fixed time period. One downside is that the cash comes with a relatively high expense, usually somewhere between 1.2 and 1.5 times the advance amount. 

So are merchant cash advances a scam or a legitimate way to fund a business? Let’s examine the evidence.

 

Short-Term Financing at a Premium

First, let’s define the terms. MCAs aren’t loans. Rather, they’re a financing mechanism in which the borrower receives a lump sum up front in order to fund business operations. These cash advances are especially useful for businesses with poor credit history that would otherwise have no other way to access cash. 

In a typical example, if a young company can’t qualify for a bank loan, an MCA may be the answer. Let’s say a business needs $50,000. The merchant bank provides that loan, with the stipulation that the borrower will repay 1.2 to 1.5 times the advance amount at the end of the term. Most MCA terms range anywhere between 3 and 24 months. 

 

Are MCAs a Scam or are they Real?

That’s a legitimate question. Over the years, there have been a number of dishonest players who have used MCAs in order to rip off business owners. In one recent example, a shady practitioner was ordered to pay $675,000 to the US government for overcharging customers and providing less money than promised. Other firms have been ordered to pay even larger fines. 

But that doesn’t mean there aren’t honest players, and that MCAs aren’t useful for some businesses. The fact is that some young ventures, or those that need a cash infusion to survive, need quick access to capital. 

Take the case of a young business with a seasonal sales flow. This new venture hasn’t had the opportunity to build up a stellar credit score and it may lack sufficient collateral for a traditional bank loan. In such a scenario, a quick cash infusion – even if it means handing over a percentage of daily sales – may be useful in the long term. The business gets quick access to cash, with which it can build the business to generate more revenue. In that setup, an MCA is a costly but effective way to get cash fast. 

 

Is an MCA Right for my Business?

There are pros and cons of merchant cash advance financings. 

 

Here are the pros:

Quick access to capital: In most cases, a business can get a cash infusion in anywhere from one to three days.

High advance amounts: A business can receive a cash advance anywhere from a few thousand dollars to $500,000 or more. 

Flexibility: the MCA provider usually takes a percentage of daily sales. So when sales are high, the business maypay back more. When sales are slow, there can be less of an obligation.

Easy application: Since it’s not a bank loan, a business owner can fill out an application in as little as 15 minutes. Even a business with a poor credit history can qualify. 

No collateral: MCAs do not usually require hard collateral. This is ideal for a young business with few assets. 

 

But there are also cons:

Expensive: MCAs can sometimes cost the business more than other financing options depending on the specific business situation. 

Strain on cash flow: Since the advance is paid directly from daily sales, if the business is struggling, that amount may place a strain on cash flow. 

Doesn’t help business credit: MCAs are not loans and do not help a young business build business credit. 

 

Verdict: MCAs Scam or Legit?

In the final analysis, merchant cash advances are an imperfect solution to a pressing business problem. Because of their sometimes expensive pricetag, if a business does not generate significant revenue, it can be difficult to stick to the terms of the advance agreement

Are MCAs a scam or are they legitimate? Like in any corner of the business world, there are honest and dishonest actors. Merchant cash advances are perfectly legal, but some actors have used them to attach hidden fees or take more than they are due. An MCA is not a scam if the people providing the cash do not abuse their authority. But like in any business, there are dishonest actors

So before you consider an MCA, do your homework. Make sure the business providing the cash advance has a good history with customers and has been honest in its dealings. Merchant cash advances are perfectly legal, but like with any transaction, it pays to do your due diligence. 

 

 

We're working on some pretty cool new pieces of content, including tools that will give you insight into your business finances.

Want to be the first to know when they launch?

What SBA Covid-19 Programs Am I Eligible For?

With Covid-19 changing business operations for most of 2020 and 2021, many business owners have turned to SBA programs like the Paycheck Protection Program for financial relief. What gets complicated is when one business is looking to qualify for more than one program – but don’t worry, we’ve put together a brief cross-eligibility guide designed […]

What Types of Bank Accounts Should a Business Have?

A crucial part of your company’s success is having the right types of bank accounts in place. Maintaining separate business bank accounts can help you stay financially organized and bolster your firm’s cash-flow management. The caveat, of course, is that having too many accounts may become overwhelming and challenging to track.  So which bank accounts […]

2019 Review of Key Bank Business Bank Accounts & Mobile App

Key Bank is an award-winning bank with a history that spans nearly two centuries, and if you’re looking for a reputable bank for your small business, Key Bank might be a good option. It’s one of the country’s largest bank-based financial service companies, and it’s still growing. Headquartered in Cleveland, Ohio, Key Bank is a […]

What Is Required to Open a Business Checking Account?

The specifics of what you’ll need to open a business checking account will vary based on your company’s legal entity type. In other words, bankers will ask for significantly different documentation from a corporation than they will from someone running a small business as a sole proprietor. When filling out your application, you will likely […]