Merchant Cash Advance(MCA) Loans: What They Don’t Want You To Know

Merchant Cash Advance(MCA) Loans: What They Don't Want You To Know

An MCA loan refers to a Merchant Cash Advance loan. It is a type of financing option available to small businesses, particularly those in the retail and service industries, that need quick access to capital. Unlike traditional loans, an MCA loan is not based on a fixed interest rate or a predetermined repayment period. Instead, it is structured as an advance on the business’s future sales. The lender provides a lump sum of money upfront, and in return, the business agrees to repay the loan by giving the lender a portion of its daily credit card sales or a fixed percentage of its daily revenue until the loan is fully repaid. The repayment process is usually automated, with the lender directly deducting the agreed-upon percentage from the business’s daily sales. This means that the repayment amount can fluctuate depending on the business’s sales performance. In times of slow sales, the repayment amount may be lower, but during periods of higher sales, it may be higher. The repayment period is typically shorter compared to traditional loans and can range from a few months to a year. It’s important to note that MCA loans often come with higher interest rates and fees compared to traditional loans, making them a more expensive financing option. However, they can be attractive to businesses that have difficulty qualifying for traditional loans due to poor credit history or lack of collateral. So the question is, Is a Merchant Cash Advance Loan right for your business?

Is Everyone Eligible For An MCA Loan?

Not everyone is eligible for an MCA loan. While MCA loans are designed to be more accessible than traditional loans, there are still certain eligibility criteria that businesses must meet to qualify. The specific requirements can vary between lenders, but here are some common factors that lenders consider:

  • Time in business: Most lenders prefer to work with established businesses rather than startups. Typically, a business needs to have been in operation for a minimum period, often six months to a year.
  • Monthly revenue: Lenders assess a business’s revenue to determine its ability to repay the loan. There is usually a minimum monthly revenue threshold that the business must meet to qualify. The specific requirement can vary, but it’s typically in the range of $5,000 to $10,000.
  • Credit card sales: Since MCA loans are often structured as a percentage of future credit card sales, lenders may look at the volume and consistency of a business’s credit card transactions. This requirement is more relevant to businesses that primarily accept credit card payments.
  • Personal credit score: While MCA loans are known for being accessible to businesses with less-than-perfect credit, some lenders may still consider the personal credit scores of the business owners or guarantors. A lower credit score might result in higher interest rates or stricter terms.
  • Industry type: Certain industries may face more challenges in qualifying for an MCA loan due to higher risk factors associated with their operations. Some lenders may have restrictions or limitations on industries they are willing to work with

Who Offers MCA Loans?

The List of Merchant Cash Advance providers is very long. According to these are the top 8 MCA Lenders:

  • Rapid Finance
  • CAN Capital
  • National Funding
  • Reliant Funding
  • Kalamata Capital Group
  • Libertas Funding
  • Square Capital
  • PayPal Working Capital

How Do These MCA Providers Rank On BBB?

The Better Business Bureau is a nonprofit organization that collects and provides free business reviews to consumers, promoting ethical business practices and resolving disputes between consumers and businesses in the US and Canada. 

  • Rapid Finance has 2 out of 5 stars on the BBB website. This is based on a total of 4 customer reviews.
  • CAN Capital has 1 out of 5 stars on the BBB website. This is based on a total of 2 customer reviews.
  • National Funding has 1.63 out of 5 stars on the BBB website. This is based on a total of 24 customer reviews.
  • Reliant Funding has 1.7 out of 5 stars on the BBB website. This is based on a total of 33 customer reviews.
  • Kalamata Capital Group has 1 out of 5 stars on the BBB website. This is based on a total of 1 customer review.
  • Libertas Funding has 1 out of 5 stars on the BBB website. This is based on a total of 1 customer review.
  • Square Capital has 1.06 out of 5 stars on the BBB website. This is based on a total of 542 customer reviews.
  • PayPal Working Capital could not be found on the BBB website.

MCA Fees

Merchant Cash Advance (MCA) loans typically involve several types of fees. These fees can vary depending on the lender and the specific terms of the loan agreement. Here are some common fees associated with MCA loans:

  • Factor rate or buy rate: Instead of using an interest rate, MCA loans often employ a factor rate. The factor rate is a multiplier applied to the loan amount to determine the total repayment amount. For example, if the factor rate is 1.2 and the loan amount is $10,000, the total repayment would be $12,000. The factor rate is predetermined and does not change over the course of the loan.
  • Origination fee: Some lenders may charge an origination fee upfront when the MCA loan is issued. This fee is typically a percentage of the loan amount and is deducted from the loan proceeds.
  • Processing fees: Lenders may apply processing fees to cover administrative costs related to evaluating and processing the loan application. These fees can vary in amount and may be a flat fee or a percentage of the loan amount.
  • Underwriting fees: In some cases, MCA lenders may charge underwriting fees to cover the costs of assessing the creditworthiness of the borrower. This fee is typically associated with more detailed underwriting processes and may be a flat fee or a percentage of the loan amount.
  • Late payment fees: If a borrower fails to make a scheduled payment on time, lenders may impose late payment fees. These fees can vary and are typically stated in the loan agreement.

It’s important to carefully review the loan agreement and disclosure documents provided by the lender to understand the specific fees associated with an MCA loan. The fees, along with the factor rate, contribute to the overall cost of borrowing and should be taken into account when evaluating the affordability of the loan.

What Are The Cons OF MCA Loans For Businesses?

MCA loans, or Merchant Cash Advances, can offer quick access to capital for businesses in need of immediate funds. However, they also come with certain disadvantages or cons that businesses should be aware of. Here are some of the drawbacks of MCA loans:

  • High costs: MCA loans tend to be expensive compared to traditional business loans. Instead of charging an interest rate, MCA providers typically charge a factor rate, which is a multiplier applied to the loan amount. This can result in a high total repayment amount, making it a costly financing option.
  • Short repayment terms: MCA loans often have short repayment periods, typically ranging from a few months to a year. While this may be suitable for some businesses, it can create financial strain for others, as the repayment amounts are usually deducted daily or weekly from the business’s sales. The short repayment term can make it challenging for businesses to manage cash flow effectively.
  • Impact on cash flow: MCA loans are repaid through a percentage of the business’s daily credit card sales or revenue. This means that during periods of low sales, businesses may still be required to make significant payments, which can put a strain on their cash flow. It can be especially problematic for seasonal businesses or those with fluctuating sales volumes.
  • Lack of transparency: The terms and conditions of MCA loans can sometimes be complex and less transparent compared to traditional loans. Some MCA providers may have hidden fees or charges, making it crucial for businesses to thoroughly review the contract and understand the total cost of the loan before accepting it.
  • Potential for debt cycle: Due to the high costs and short repayment terms, some businesses may find themselves in a cycle of debt. If they need additional funds after repaying the MCA loan, they may be tempted to take out another loan to cover the ongoing financial needs. This can lead to a cycle of borrowing, making it difficult for businesses to break free from the debt burden.
  • Limited regulation: MCA loans are not subject to the same regulatory scrutiny as traditional loans. This can lead to less protection for borrowers and potentially expose them to predatory lending practices. Businesses should carefully research and choose reputable MCA providers to mitigate this risk.

It’s essential for businesses considering MCA loans to thoroughly evaluate their financial situation, assess the costs and risks involved, and explore alternative financing options before making a decision. There are other options available that don’t come with all the risks and potential issues of a MCA loan.

What Happens If You Can’t Make The High Payments And Default On An MCA Loan?

When you default on a Merchant Cash Advance (MCA) loan, it means you have failed to fulfill your obligations as outlined in the loan agreement. Defaulting on an MCA loan can have several consequences, which can vary depending on the specific terms of the agreement and the policies of the lender. Here are some potential outcomes when you have defaulted on an MCA loan:

  • Collection efforts: The lender will likely initiate collection efforts to recover the outstanding amount. This may involve contacting you directly, sending collection letters, or engaging a collections agency to pursue payment on their behalf.
  • Additional fees and penalties: Defaulting on an MCA loan can lead to the imposition of additional fees, penalties, and interest charges. These fees can increase the total amount owed and make it more difficult to repay the loan.
  • Negative impact on credit score: MCA lenders may report the default to credit bureaus, resulting in a negative impact on your credit score. A lower credit score can make it more challenging to secure financing in the future and may affect your ability to obtain favorable terms on other types of loans or credit.
  • Legal action: In more severe cases of default, the lender may decide to pursue legal action to recover the outstanding amount. This could result in a lawsuit being filed against you, and if the lender obtains a judgment in their favor, they may be able to seize assets or place liens on property to satisfy the debt.
  • Business disruptions: Defaulting on an MCA loan can have implications for your business operations. Lenders may place holds or restrictions on credit card processing systems, freeze merchant accounts, or utilize other means to recover the funds owed. These actions can disrupt your cash flow and hinder normal business activities.

What Options Are There To Increase Cash Flow Without A MCA Loan?

If you are a business owner who is struggling with debt it may be in your best interest to seek professional help. An MCA loan may seem like a great option on the surface, but the truth is that taking out another loan with extremely high interest rates may not be the best option, as falling further into debt is a potential risk. The best way to increase cash flow is to work with a reputable commercial debt counseling company that can either consolidate all the debts into one debt or settle the debt by negotiating with creditors. Commercial debt counseling is available to assist business owners with resolving their outstanding business debt.

Enlist The Help Of A Professional

If you have defaulted on your MCA Loan or are looking for a way to increase cash flow, it may be in your best interest to enlist the help of a professional. CuraDebt has a commercial debt counseling program and has been helping individuals and small businesses settle their debts for over 21 years nationwide making the company and team one of the oldest and most experienced in the industry. Contact us toll free today for a free consultation. 1-877-504-0981. Take advantage of learning how we may be able to assist you. Not only do we handle individual and business debt relief, we also offer tax relief.

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