Merchant Cash Advance (MCA) gives a breather to several businesses that do not get accepted by banks for loans due to their risk profile, low credit score, lack of satisfactory guarantee or short time in business. With all the advantages promised by MCA, business owners would still prefer a loan or line of credit. The reason behind this is that the interest rates charged by MCA providers can amount to 30%-200% APR - an ill affordable cost for any commercial enterprise.
Value proposition of merchant cash advance
MCA providers are at pains to convince customers that the advance is not a loan. MCA is a sale of your future credit card sales at a discount. This makes it easier and faster to obtain an MCA. The advance gets transferred to your account in less than a week; there's no collateral required; the retrieval rate is a fraction of your monthly credit sales, because of which the amount returned fluctuates with the sales volume; no stress to make a fixed payment; no extensive paperwork; and high approval rates.
At the same time, there is also a large retrieval rate, short terms of recovery (typically not more than a year), and in a lot of situations a contract that is as broad-based as possible.
Merchant cash advance - is it a sugarcoated pill?
Business owners with no other funding alternatives apart from MCA realize soon enough the hole the advance cuts into their income. While a number of principled providers are implementing good practices to standardize the MCA market, there are some who leave very little for a business to fuel internal operations. Retrieval rates proposed by superior providers are reasonable (around 9%) and can be as little as 1% for businesses that do not make huge profits. However, many businesses end up paying as much as 30% as premium on the money that is advanced.
One more important downside of MCA is the unclear contract between funding source and customer. The terms could be so all-inclusive that a business can become answerable for making even the smallest changes to the business. Providers skirt around this allegation by reiterating that they foot the loss if the business does not show expected returns. Nevertheless, this does nothing to minimize the risk for the business.
The fact that MCA is not a loan is also its biggest minus point as it is a totally unregulated industry. This freedom gives providers a lot of leeway. The agreement is the only protection against being cheated, making it vital for you to understand it thoroughly.
What is the road ahead for the MCA industry?
The merchant cash advance industry has been progressing speedily in spite of its high rates. The big players realize that the rip-offs working amongst them will not only bring bad reputation to the profession but also invoke the attention of regulators. They have joined hands to create the North American Merchant Advance Association (NAMAA) to bring some order into the industry. NAMAA has published tips for clients to protect themselves from deceiving providers.
It is not practical for all types of businesses to get funds from traditional sources. For such businesses, MCA is a road that though dear is the only one available. Third-party brokers often showcase MCA like it were a haven for hard up businesses. However, it is extremely important to understand its disadvantages before applying for it. In fact, professional MCA providers would much rather be acknowledged as a funding source for business development and not rescue.