The Merchant Cash Advance or "MCA"
This little gem can be a lifesaver for a company that needs money quickly (under 2 days) as long as they have the money to pay it back.... and there lies the problem with MCA's. An MCA is not technically a loan because it is collecting a percentage of your future receivables or sales. If your revenue drops then the lender is supposed to ease up on their daily or weekly ACH debits, but they rarely do, and financial trouble happens pretty quickly after that. Some would argue it is a loan because party "A" is giving party "B" money and party "A" expects to be paid back, so may people consider it a loan....even though the MCA companies swear it is not. So the MCA "lender" can get you a quick $50,000 by just looking at your bank statements and a quick look at your credit report. The daily or weekly repayment rate seems attractive because it's just a small "bite" out of your daily or weekly revenues. No sweat, right? Well be extremely careful because many people (we figure it's about 70% of borrowers) will "stack" MCA's on top of eachother. This occurs when you borrow (for example) $50,000 on a friday and the money appears on Friday as well. Then you find in a month that you may need another $20,000 for some other project or you may feel that $20,000 could help "pad" your working capital balance to give you some breathing room. Easy enough, you just go get another MCA becuase MCA companies will lend money to most companies all the way until they are spending 100% of their available cashflow (sometimes 120%) on repaying the MCA payments. It doesn't take too my visits to the same MCA well to stack yourself out of business. So be incredibly careful about using MCA's for "working capital" because the interest rate is often well over 400% even though you never really see it stated as 400%. It's always some kind of "factor" like 1.24 or 1.36 etc. Tie that factor rate into the number of months to repay the loan, do a little math and your eyes will be wide open after reading the interest rate.
Not All MCA "Lenders" Are Bad
The good MCA lenders will have a real underwriter who actually went to school to learn about underwriting guidelines and perhaps also worked at a real bank and learned the skils necessary to determine if a borrower (like you) has the ability to repay the MCA. You can often find those real MCA companies when they ask for some financial statements in addition to looking at your bank statements. Bank statements often don't tell the whole story about your financial condition and a good underwriter will examine your numbers carefully (although quickly) to see if you can repay the MCA. The bad MCA lenders will ask you to send them "the best bank statements" (if you have multiple accounts) or "statements that don't show you have other MCA's" - and those are the dangerous ones because their underwriters are being given only partial information on your ability to repay so if they say "OK" it may be the kiss of death to your company because two or more MCA's can often bring your available cash balance to zero or even below zero. CAUTION....while it may seem just so darn easy to get $50,000 just on your signature, that $50,000 often turns into $80,000 when repaid, and the lender wants their money paid back quickly (like in under 1 year) so can you really afford those $330-a-day payments? Maybe right now, but what happens if things slow down? What if something happens to dent your steady cashflow? Think! Falling behind in payments means default and these days MCA lenders don't take too kindly to defaulting. If you signed the dreaded "COJ" (read about it here) then they will walk into the courthouse and get a judgement against you in a matter of days. Then your life gets complicated. Always check the comments about MCA lenders and see what others say about them. Remember, comments can be bought, and good ratings can be paid for so really do your homework and research on the MCA lender if you choose to go with an MCA.
Want to See The "Other" Side of the MCA Industry?
Bloomberg did a fantastic series about the MCA industry and we recommend everyone read their articles thoroughly. This will give you a good idea about the good and bad side of the MCA industry. You can read those articles by following this link Sign Here to Lose Everything (series of articles on MCAs) Again, not every MCA lender is like this but the number of bad lenders out there is growing by the day. Be careful, be very careful. Vinny and the boys would love to lend you $50,000 but if you don't pay it back, or fall on to hard times, Vinny doesn't play very nicely when that happens.
Read Everything Twice
The contracts and/or agreements that come along with MCA's may seem straightforward and only take a few clicks in a DocuSign document, but READ IT CAREFULLY because some of the shady lenders will put in phrasing that essentially gives them rights to everything you own, gives them a power of attorney over your entire life, and gives them access to all of your banks should you default. Just read everything carefully because this is a totally unregulated industry. There are some very good, ethical, and professional lenders but there are also some true loan sharks that will eat you alive and spit you out.