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.
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