MCA Loans Torpedo Traditional Loan Options
Steve Capper/Flexible Funding - August 19, 2020
Whether or not you know what it is, you have been solicited by an ‘MCA’ or Merchant Cash Advance financial lender. Even with the best spam filters, they somehow get through to your inbox. They may intrude in the form of pop-up web banners or appear as ads on sites that you regularly use. And worst of all, even with the best of screening, telephone cold callers at boiler rooms in New York and Florida deviously get through to business owners to offer “quick and easy capital.”
MCA or Merchant Cash Advance lending is a type of lending focused heavily on the borrower’s historical cash flows as shown in their bank statements. Although the word ‘merchant’ is in the name, that does not mean that it is only for retail merchants; it can be for almost any business --and is simply a form of business lending. With many MCA’s there are online application blanks to fill in before you are told much at all, along with soft language about how easy it is and lightening quick funding approval. As with licensing software or computer programs, there may be an online contract that you will not take time to read and then quickly scroll down and click a box that says “I Agree”.
If very carefully disguised rates of 30% to 85% annual interest aren’t enough to discourage you from these products, consider below the detrimental affect it can have on your other current financing or other future financing options.
When you sign with an MCA lender, you shoot yourself in the foot. MCA is the ‘payday loan for a business.’ It’s predatory lending … the interest rate will eat your business alive. As long as you are with an MCA lender, lesser-cost more traditional lenders including factors, banks, asset- based lenders and payroll funding companies will not want to work with you (until the MCA is out of the picture.) Or, it might cause your current lender, if you have one, to terminate funding.
MCA lenders get preauthorized direct access to pull monies out of your bank account to get themselves paid back, typically on a daily or weekly basis, attaining an extremely high rate of return. Whether it damages your business or not, they will usually continue to do so. If a more traditional financier such as an asset-based lender, factor or bank were to fund you at the same time for the purpose of ‘supporting’ your ongoing business, the MCA lender would be able to instantly dip into your bank account, stealing the proceeds, which would not support your business. In most cases, an MCA lender will cause a sinking ship and a very strapped business owner. Such tactics are sure to put a traditional lender’s loan and/or collateral at peril. More traditional Non-MCA lending sources all know that a sinking ship is an environment ripe for fraud and desperate tactics by a business owner. Common examples of fraud, problems, and desperate tactics by a business owner include:
- Creation of phony invoices or accounts receivable.
- Padding of payroll with fake employees or exaggerated amounts.
- Intercepting, cashing and spending monies that were required to flow directly to the bank, factor, or lender.
- Not paying, and getting behind in IRS or State taxes, sometimes leading to an IRS priority interest in collateral.
- Getting seriously behind on business expense or labor payables, which leads to lawsuits.
- Not paying or getting seriously behind on workers comp payments/premiums.
If you already have a more traditional financing source, adding an MCA loan will damage or even fracture the relationship with your traditional source. Don’t think that your traditional lender won’t find out about it, because one way or another they do find out about it. The MCA lender may record a public Uniform Commercial Code filing (UCC filing) at the Secretary of State where your business is domiciled. Traditional lenders have rights to the books and records of your business, including business bank statements which clearly show the MCA lenders debits against your bank account (or their agents or processors debits against your bank account).
That you even signed up for an MCA loan without first discussing it with the traditional lender is a breakdown of trust. A majority of traditional lenders have it written in their financing contract that you cannot add on loans behind them, or that you may not further encumber the collateral. Such restrictions may also be clearly stated in the wording of their collateral description.
The traditional lender certainly doesn’t want the MCA lender ever contacting the customers of your business (to say that the MCA has rights to any of the payments for services or goods) in both the normal course of business or in the event of any stress/default situation. To head it off at the pass and eliminate any possibility for contest of monies, a traditional lender learning of an MCA loan behind them will suddenly get fierce with verifications, collections, and legal notices to the customer account debtors. Some business owners don’t appreciate heavy hands on their customer accounts.
There are many other reasons more traditional lenders detest MCA loans. Traditional lenders—banks, factors, payroll funding companies, and asset-based lenders know too well that if your business doesn’t already have enough margin and markup to begin with , how are you going to weather MCA fees with returns of 30% to 80% annual interest on top of that? They also know with an MCA loan you will be so highly leveraged, that there is no cushion for customer bad debts, disputes and offsets.
Many MCA’s don’t know how to gracefully deal with defaults and will find a way to cave or crash your business. It is known that the MCA industry has a high rate of defaults, and the risk to a traditional lender becomes greater when its borrower obtains multiple MCA loans, one stacked on top of another. If the more traditional lender missed any of the signs of the relationship—the existence of an MCA lender—they will unfortunately learn about the problem when the MCA takes aggressive and hostile collection efforts. This may include enforcing confessions of judgment, making demands upon a lender/factor for reserve accounts, or confusing customer account debtors with demands for payment. In such cases, the customer accounts may pay nothing at all, which will paralyze cash flow until competing claims are understood.
MCA loans can be problematic at any stage of a company’s life cycle. MCA money is too expensive function as startup capital… it will only serve to stress or sink a business. And these monies should not be used for ‘payroll.’ 80% to 90% funding of accounts receivables or invoices should be more than enough to make ‘payroll’. If it is not enough, you just don’t have enough margin/markup to sustain your business.
Whatever the situation is that made you consider an MCA loan, the actual taking of the MCA loan will almost always make the situation worse. That an MCA loan is so ‘fast and easy’ is a huge trap for so many people. If you don’t have a lender, and have credit worthy accounts, always seek out a more traditional asset-based lender or factor and comply timely with all of the lender’s due diligence checklist. Be open and upfront about everything as anything they may find (otherwise) will slow down the due diligence process. If you already do have a more traditional lender, factor or finance company, never get an MCA loan without their permission.