What is a Merchant Cash Advance?

By Robert Jacovetti

A merchant cash advance (MCA) is one way that business owners can borrow money for the operation of their business. While MCAs may provide temporary relief for financial struggles, they often end up becoming predatory and cause the business owner to fall into a vicious cycle of borrowing.

Learn more about MCAs and what to do if you’re struggling to pay one back.

Merchant Cash Advances Explained

MCAs started in 2009 when small banks and lenders stopped loaning money to small business owners. As a result, many business owners turned to MCAs to borrow money for their business.

An MCA isn’t a typical loan; it’s a cash advance based on the credit card sales in a business owner’s merchant account (its future revenue). The MCA payments are then automatically deducted from the business owner’s revenue each day until the advance is paid back in full.

In a typical MCA, lenders and borrowers agree to a daily or weekly payback schedule and in return, the lender gets a percentage of sales from the borrower. It’s important to keep in mind that the payback amounts do not reflect the actual revenue of the business. Most lenders have an affixed amount that they take from the business, even if sales are slow.

The Pros and Cons of an MCA

As with most financial services, MCAs come with benefits and drawbacks. Some of the benefits of an MCA include the following:

  • Quick approval process. Once the requested documents are submitted, the borrower will know whether they are approved or denied fairly quickly. Once approved, the funds are quickly deposited into the business owner’s account.
  • Some lenders do not require collateral. Most MCAs are unsecured loans, which are typically accompanied by a confession of judgment from the borrower. This means that the lender may restrain the borrower’s bank account upon loan default.
  • The amount of sales equates to the amount of payment. The payback amounts will vary depending on credit card sales. As such, it’s important for business owners to ensure they have enough cash on hand to pay the rate the lender will take from sales.

One of the perceived benefits of an MCA is the “quick fix” it can provide for any financial struggles the business is experiencing. However, it’s important for business owners to keep in mind that while MCAs may provide quick cash when needed, they also have the following drawbacks:

  • Not federally regulated
  • High-interest rates that increase with higher business sales
  • A tendency to lead to another MCA in the future, creating a vicious cycle of borrowing

When borrowers can no longer afford to make the minimum payments on the MCA, they may not know where to turn. The MCA will keep taking a percentage of sales from the business’s account, even if business is quite slow. In this case, the MCA would literally be sapping the business of all its funds.

In this situation, many borrowers choose to borrow from multiple MCAs just to get out of the financial hole they have gotten into. This only increases the vicious cycle of borrowing for many business owners.

It’s important for business owners to remember that MCA lenders are quick to bring lawsuits against borrowers for missed payments. Often, MCA lenders harass borrowers over the phone and through mail and email in an effort to recover outstanding balances. This can lead to a feeling of constant stress and hopelessness on the part of borrowers who feel they have no way out.

We want you to know that you do have options. At Jacovetti Law, P.C., our merchant cash advance defense lawyer Robert “Bob” Jacovetti has dedicated his practice to protecting debtors’ rights. Our team can help you make arrangements with lenders to ensure you make the necessary payments while also keeping your doors open.

If your company or business is struggling with debt, contact us today at (516) 217-4488 to learn how we can assist you.