Merchant Cash Advances, boon or bane?

Small businesses are the backbone of the economy. Yet, for these small businesses to succeed, they need access to capital. Some startup ventures find difficulty securing bank loans so they end up dealing with Merchant Cash Advance providers.

• What is a Merchant Cash Advance or MCA?

People faced an uphill battle to get a loan with a bank, small businesses look into alternative lending options like Merchant Cash Advance.

In a CNN Money article titled “Non-bank loans: Quick, easy…and addictive” on July 18, 2014, MCA was described as an option whereby “business owners essentially borrow money from themselves (from revenue they’ve yet to receive) and pay it back in small daily remittances, plus a flat fee.”

Following the recession, many small businesses in the United States have been looking for an infusion of capital to resuscitate the business. Many have tried but failed to get bank loans for lack of credit history or for dismal credit scores. Just as when their applications are nixed by the banks, MCA providers come to their rescue and offer capital in exchange for future credit card sales.

Many of these businesses pinned their hopes on this extra cash to revive their struggling business or to start a new venture, had no choice but to deal with MCA providers.

They instantly get the funds from the providers and in return, the MCA provider gets a share of the daily credit card sales from the processor that clears and settles the credit card payment.

Small businesses would have gotten a better deal with a bank loan; however, many banks consider a big risk to provide loans to new businesses.

• What makes MCA appealing?

Small businesses wanting a fast solution to its cash-flow problem turn to MCA shops or providers to access additional capital. Its quick processing compared to securing loans with banks.

MCA providers, unlike banks that look at credit scores as part of their underwriting criteria, they look at the business’ performance over time. The demand has risen of late that MCA providers no longer need to advertise their service as the businesses find them.

As the number of providers and the borrowers grow, hedge funds have been reported to have started considering investing in an MCA provider, noting the profitability of the said operation.

Either on a daily or a weekly basis, the business remits a fixed portion or percentage of its daily credit card or debit card sales automatically until the cash advance is paid in full. It allows the business to have a more flexible repayment schedule when business is slow. Unlike a bank loan, there is no definite maturity date or repayment date.

But some who have dealt with MCA providers caution the others to be more prudent in making this decision. Some complained that it was a usurious practice, choking their businesses until they go belly-up. They cited the high interest rate and repayment that have crippled their operations.

Some experts clamor that; more efforts should be geared at regulating this burgeoning industry to curb abuses and to promote best practices. Providers see that it is in their best interest to promote industry standards to avoid scrutiny from regulators.

Meanwhile, in an article posted on Entrepreneur.com, it recommended that businesses consider MCA as a stop-gap measure. “Sometimes a cash advance is genuinely necessary, but it’s important to know when to pull the trigger, and when not to. Whether the cash advance comes from a credit card or a Merchant Cash Advance, this facility is best used as a stopgap when there’s an expected increase in revenue. For example, if you’re a contractor and, in order to win a bid on a $500K job, you need to have upfront money for materials and labor. Or you’re opening a retail location and need to buy inventory.”

But businesses, before they consider taking an MCA, must look into other available options.

If done right, MCA proved a viable alternative to bank loans when businesses thirst for the much needed capital infusion to grow the business or to start in a new venture. As to interest rate, some providers are able to work a flexible repayment method with the businesses so as not to choke their operations.

• MCA as a stop-gap measure

For some who have dealt with MCA providers, they advise that resorting to getting advances from an MCA provider should be a stop-gap measure only. When you, as a business, is expecting a huge payout or a big contract, and having factored in the amount of sales that would have been allocated as repayment should you proceed with this MCA transaction, then taking an MCA is a sound decision.

Otherwise, taking an MCA should be a last resort. There are other alternative financing solutions available including the Obama Administration’s federal program, State Small Business Credit Initiative which is geared at helping small businesses like yours succeed.