Merchant Cash Advance (MCA), also called business cash advance, brings reprieve to various businesses that do not get approved for loans because of their riskiness, poor credit score, lack of acceptable collateral, or newness in the industry. With all the advantages that MCA brings, business owners would still prefer a loan or a credit line. This is because the interest rates charged by MCA providers can amount to 30%-200% APR – an ill affordable cost for any commercial enterprise.
Selling points for merchant cash advance
MCA providers are at pains to convince customers that business cash advance is not a loan. It is a purchase of your future credit card sales. Therefore, it does not involve the rigmarole of acquiring a loan. The advance gets transferred to your account in a week or so; there’s no collateral; the retrieval rate is a percentage of your monthly sales, therefore it fluctuates with the business revenue; no pressure; minimum paperwork; and high approval rates.
At the same time, there’s also high retrieval rate, short term of retrieval (typically 9-12 months), and in many cases a contract that is as broad as it can get.
Merchant cash advance – is it a sugar coated pill?
Business owners who have no financing options apart from MCA realize soon enough the hole the advance cuts into their income. While some ethical providers are working to keep the industry clean, there are those that leave very little for a business to fuel growth. Retrieval rates purported by reputed providers are less than 9%; even as low as 1% for low-margin businesses. However, many businesses have to pay up as much as 30% as premium on the money that is advanced to them.
Another significant drawback of MCA is the ambiguous contract between provider and customer. The terms could be so broad that a business becomes liable to breach for making even the smallest changes to her business model. Providers skirt this charge by claiming they foot the loss if the business goes under. However, this by no means reduces the risk for the customer.
The fact that MCA is not a loan is also its greatest risk as it is not regulated by the laws governing loaning institutions. This gives providers a lot of leeway. The contract is your only safe hold, making it doubly important for you to understand it completely.
What is the way forward for MCA industry?
The MCA industry has been growing in spite of its high cost. The industry leaders recognize that the swindlers in their midst will not only bring disrepute to the profession but will also evoke the attention of regulators. They have joined efforts to form the North American Merchant Advance Association (NAMAA) to bring some order into the industry. NAMAA has published guidelines for customers to protect them from unsavory providers.
It is not viable for all kinds of businesses to get finance from conventional sources. For them, MCA is an option that though costly is the only one available. Third-party brokers often showcase MCA as a godsend for hard up businesses. However, it is critical to understand its disadvantages before taking it on. In fact, professional MCA providers themselves want to be perceived as a funding source for growth rather than deliverance.