Why MCA Loans Are Bad For Your Business [There’s A Better Option]

You know that the best way to do things is rarely the easy way. An MCA (Merchant Cash Advance) Business Loan may seem shiny on the outside, but before you sign the dotted line against your future credit, read this article to decide if it’s a necessary plan of action or if it will cost you a lot of your profits in the long run.

If you’re a business considering an MCA loan, you need to understand precisely what you’re getting yourself into!

With steep costs and borrowing against your credit card transactions, you will, in all likelihood, worsen your situation.


Why MCA Business Loans Are Bad For Business

Here are some facts that I recently pulled from various searches on Google:

  • In 2016, a New York Judge determined that an MCA Loan is not a loan at all. It is an advance on your future credit and income.
  • An MCA is the most expensive kind of loan with the highest fees compared to all other business loans that are legitimately loans. It has some of the highest APR’s out there.
  • MCA’s are not regulated by the same standards as all other business loans – because of the fact that it’s not operating like a loan. Due to this, some directly correlate MCA loans with shady business practices.
  • MCA’s are not tax-deductible.
  • The percentage rate annually can be between 70-350%. This is incredibly high, and it will be more affordable to take out a small business loan directly from a lender or a bank instead of your future credit.
  • You have to make daily payments as a main requirement of the “loan” or create transactions daily on your credit cards. This is because the future credit is expected to be paid immediately by you paying out to other businesses so the MCA can reap the most off of you the fastest. This also has you spending more than usual to compensate for a loan you couldn’t afford in the first place and giving up a percentage of all of your revenue.
  • You can rarely emerge from an MCA without a huge loss, and it is very difficult NOT to end up in debt. People who take out a cash advance are at the highest probability of defaulting on their credit debt. The lenders know how high of a risk you are and will charge much higher interest rates than usual.

How Does A Merchant Cash Advance Loan Work?

A Merchant Cash Advance is defined by US News as: “an advance on your firm’s future credit card and debit card sales. In other words, you’re borrowing against your future revenue.”

The scary thing about these advances is that they are barely regulated as the government cannot place traditional lenders’ regulations on these businesses since MCA’s are not technically offering people loans.

This allows MCA’s to get away with a lot of unfavorable business practices that other legitimate business loan options simply aren’t allowed to do to their borrowers.

It will sound like the easiest solution at the time, but when you’ve given someone the lock and key to your future revenue, you’ve really tied both of your hands behind your back. Most borrowers that take out an MCA Business loan end up signing their rights to their money away for longer than they meant to, paying sky-high fees, and sometimes ending up with more MCA’s to pay off the initial MCA’s that they couldn’t afford in the first place!

It becomes a vicious cycle. Don’t start a cycle that you won’t be able to get out of without permanently damaging your credit.

Another important quality of these ‘loans’ is that they don’t charge interest, only fees that will build up progressively over time (called Factor Rates.)

What You Need To Understand About Factor Rates

The factor rate is akin to the APR or interest rates. Since an MCA is not a real loan, they don’t charge interest, but they charge a much-worse beast called, ‘Factor Rates.’ The standard factor rate will make your total MCA loan around 1.5 times the amount you initially borrowed. So if you borrow $100,000 – you will pay $150,000.

If you are a company that can easily pay that amount back, you should opt for a safer business loan instead of an MCA.

What it means if you default? If you do not pay off the loan or do not have the revenue for them to take from your daily credit card transactions – they will start taking your personal assets. It will be disclosed in the fine print, so make sure you review all of it.

MCA’s Can Have Extremely High APR’s

An MCA loan that starts out sounding very affordable can end up costing you much more than you will initially be led to believe. (In case you don’t know, APR stands for Annual Percentage Rate and is used to express the total annual percentage rate of all your loan costs for borrowing money.)

Let’s run through a quick example so you can see the math:

  • You take out a $40,000 cash advance from an MCA loan officer/lender.
  • You make payments of $150 a day for 365 days (1 year).
  • These payments equal $54,750.00

So you are paying nearly $15K in fees for a loan you’ve paid back relatively quickly in one year.

At daily payments for a year, you are paying a huge APR.

If you meet with an MCA loan officer, don’t always trust the APR or fee amount they show you. It will always be more in the long-run.

Merchant Cash Advances have the highest fees of any other business loan, along with all of the other disadvantages on our list such as not being tax-deductible. This loan will cost you the most in the long-run and go over 100% in APR if you pay it off too slowly. Don’t fall into this trap of a cash-advance agreement.

MCA’S Should Always Be A Last Resort

As we conclude this article here a just a few more reasons to remind you why MCA’s are not the right option for your business.

Cash Advances Like MCA’s Increases Chances Of Defaulting

The Balance says one of the reasons you should avoid a Merchant Cash Advance is because “people who take out cash advances are more likely to default on their credit card debt than people who do not.”

You may be one of the lucky ones that gets out on the other side without a scratch. But in all likelihood, you will end up deeper in debt than you were before seeking out this solution. If there’s something that everyone can agree on about an MCA, it’s that it is not your first option.

MCA’S Require Daily Payments

By signing over your credit to an MCA, you are handing them to rights to your money for as long as it takes to pay off the loan.

The perk of this (and one of the only perks of an MCA) is that if you’re not making a ton of money, you aren’t paying as high of daily fees.

But if you are making money, a huge chunk of it will be swiftly removed from your account on a daily basis! As US News Loans says of the Merchant cash advance, “there’s no benefit to paying off your advance faster because payments are fixed, based on a percentage of card sales.”

An MCA is Not Tax-Deductible

Just as the APR and fees are higher, MCA’s will also cost you more around tax season by not offering any tangible benefit to your business.

Forbes phrases it beautifully by stating, “Additionally, their “fees” aren’t technically interest payments, but purchases of your future receivables. Therefore, most CPAs can’t or won’t write your payments off on your return. You’re paying interest with none of the tax benefits of actual interest—so avoid this option if you can.”

Final Thoughts

If you’ve reached out to lender after lender for a traditional business loan and are getting turned away because you don’t have the credit to prove yourself or the history of excellence – an MCA may be your only option. One workaround some prefer is to take a loan from a family member or find a private loan instead.