Merchant Cash Advances ("MCAs") come with advantages and disadvantages.
It is critical to understand these pros and cons before considering an MCA:
PROS OF MERCHANT CASH ADVANCES (MCAs")
1. FAST FUNDING ACCESS: MCAs are known for their speed. Businesses can often receive funds within a few days or less, which can be crucial for addressing immediate working capital needs.
2. SHORT APPLICATION PROCESS: Applying for an MCA is typically less time consuming than applying for a traditional loan.
3. LOW CREDIT SCORE REQUIREMENTS: MCA providers place less emphasis on personal or business credit scores, making them accessible to businesses with lower creditworthiness.
4. REVENUE-BASED REPAYMENT: Repayment is tied to your future sales deposits, which can be advantageous during slow periods, as payments are able to be adjusted, according to the MCA contract language.
CONS OF MERCHANT CASH ADVANCE ("MCAs")
1. HIGH COST OF CAPITAL: MCAs are typically more expensive than traditional loans. They involve fees rather than interest rates, which can result in high effective Annual Percentage Rates (APRs) in 60% to 120%+ range.
2. FREQUENT PAYMENTS: MCA repayments are typically collected daily or weekly via automatic ACH, which can strain your Company's Cash Flow and limit your Company's liquidity (cash).
3. DEBT STACKING: Some Businesses take multiple MCAs along with other Business loan products which can lead to a cycle of debt stacking and financial & Cash Flow strain. 3 or more MCAs typically leads to default.
4. NEGATIVE CASH FLOW IMPACT: MCAs daily or weekly repayment structures can impact your Business' Cash Flow management, potentially making it challenging to cover other critical operational & vendor expenses.
5. UNREGULATED: MCAs are less regulated than traditional loans, which can result in PREDATORY and ILLEGAL lending practices.
6. HIGH RISK OF DEFAULT: If your business experiences a prolonged period of low sales, repaying an MCA can become particularly challenging and may lead to default.
7. LIMITED USE: MCAs are best suited for one-time needs, such as covering urgent expenses or seizing growth opportunities. MCAs are not ideal for long-term financing or ongoing operational costs.
8. UCC LIENS: MCA financing providers typically file a UCC-1 blanket lien across all Business assets. This presents a risky and dangerous situation if your Company begins to have challenges paying back the MCA. UCC lien holders can exercise their rights against Accounts Receivable AR (clients) and/or Merchant processing accounts, immediately seizing a Company's future sales.
Before considering an MCA, carefully evaluate your business's financial situation, explore alternative financing options, and thoroughly review the terms and costs associated with the MCA offer.
Consulting with financial advisors or business consultants can provide valuable insights into whether an MCA aligns with your business's goals and financial health.
Merchant Cash Advances ("MCAs") come with advantages and disadvantages.