Merchant Cash Advances (MCA) are often a last resort for American small businesses that can’t get traditional loans from banks or other investors. MCA providers claim they’re just buying a piece of a business’s future sales rather than giving a loan. By doing so, they argue that regular lending rules don’t apply to them.

But here’s the kicker: these MCAs can charge crazy high interest rates – sometimes more than 100% of what they gave the business upfront.

Merchant Cash Advances Aren’t What They Seem

Despite what they claim, many MCAs are essentially acting as lenders without playing by the same rules. While there are many reputable companies offering MCA financing, the industry is largely unregulated and has its fair share of shady operators.

MCAs typically find their clients through a network of “loan brokers”. These brokers may get big bonuses for connecting them with businesses in need. They might say they’re helping find new sources of capital, but often they’re not really considering what’s best for those businesses. The perfect MCA client is a small business that desperately needs cash but isn’t about to “go under” anytime soon. MCAs want businesses that are desperate enough to take the idea; yet stable enough to keep making hefty repayments.

How to Spot an MCA in Action

It’s pretty easy to spot a company dealing with an MCA. Just look at its primary checking account. You’ll see a lump sum deposit from a funny-sounding name, like “ABC Capital Company”, for a certain amount, say $75,000. Right after that, you’ll start noticing regular daily or weekly withdrawals of the same amount, like $3,333.33.

If you keep track over 45 days, you’ll see a total of $150,000 was withdrawn by the same company that made the $75,000 deposit. Quick math: $3,333.33 x 45 days = $150,000 (200% of $75,000). Without ever calling itself a lender, the MCA gets its money back plus a whopping 100% interest.

Using legal loopholes, MCAs can pull sneaky moves on other lenders, like senior secured banks. This allows them to practice “stacking” – lending to a borrower and claiming collateral that’s already pledged to another lender.

Why Should Banks and Small Businesses Care About MCAs?

This video explains more about what MCAs are, how they work, and why everyone should care – especially banks and small businesses stuck in bad MCA deals. You will also find tips on how businesses can break away from toxic MCA relationships and strategies for negotiating out of these tough spots.

Conclusion

While MCAs can offer a quick cash fix, they come with significant risks that often outweigh the benefits. Small businesses must understand what they’re getting into and explore all other options before turning to an MCA. For those already tangled up with an MCA, there are ways to negotiate and break free with informed strategies.

If you have questions about this article or topic; please contact attorney Joseph Brown at Fausone & Grysko, PLC today. (248) 380-0000