Beware of Merchant Cash Advances (MCAs)


As independent restauranteurs, the hunt for capital is kind of an ongoing situation. We’re perpetually either looking for money to get started, looking for money to keep everything rolling (like getting vendors paid and meeting payroll), or looking for cash to make new moves which will help grow our businesses, such as investments in new equipment or features.

For many of us, this ongoing thirst for more capital can be challenging. Banks aren’t likely to loan to new businesses with unproven ideas, particularly if your credit is less-than-stellar. And even traditional business financing, such as a line of credit or equipment financing, typically isn’t an option until your business has been established for a set number of years, or hit certain monthly revenue milestones.

If you’ve been on the hunt for a quick injection of cash for your business, you’ve no doubt been inundated with advertisements and text messages promising you quick capital, in as little as 48 hours, with no credit requirements. Dig a little deeper, and you’ll find that what you’re being offered isn’t a traditional loan: It’s an MCA, or Merchant Cash Advance. And while this quick access to capital can be of some benefit to some customers under the right circumstances, like any sort-of shady quasi-financial product, there’s a whole world of other complications to be aware of.

First, some quick backstory. I’m not, by any stretch of the term, anything approaching a financial advisor, or tax professional, or hell, even a very good adder-upper. But like many seasonal businesses, I recently found myself with a short-term cash flow hiccup. And like a lot of people, I accepted a Merchant Cash Advance, to help weather the storm. The deal seemed good, on paper: An $8,000 loan, paid back over seven and a half months, at the rate of $96 every weekday (conveniently withdrawn from my business bank account daily), for a total payback amount in the neighborhood of $12,000. That’s a hefty interest rate, sure…but when you have bills due and business is slow, a quick injection of $8,000 is easy to talk yourself into.

The one loan wouldn’t have been a problem for my business to absorb. It was when I took a SECOND loan, for another $8,000, paid back at $300 per week, that things got a little dicey. As in, “Bruh, that’s $800 a week, going right out the door, before you’ve paid for anything else.” And as you might expect, this is extraordinarily disruptive to my business’ cash flow, making things like meeting payroll and paying inventory even more challenging.

It wasn’t until I started exploring a THIRD loan, that I decided to pump the brakes, and write this post, instead. Because if I was going through these types of mental gymnastics, chances are, other restaurant owners were, too.

A third loan, I rationalized, would allow me to repay the first two MCAs at a more reasonable payback schedule, while hopefully leaving a little slush money left over for other projects. I spoke to at least half a dozen salesmen, mostly in Long Island or Massachusetts, who each presented themselves as finance wizards with thousands of satisfied customers, who only had the best interests of my business in mind. I had almost talked myself into the idea that a third MCA for $20,000 with a $1,000 weekly draw (and $8,000 in interest) would help, because it would allow me to pay off the first two, with a few thousand dollars left over. But then, one of the high-pressure salesmen I was speaking to started referring to me alternately as “My friend” and “Buddy,” and that’s when the mental alarm bells sounded.

I quickly realized that I was about to sign on for a third loan that would net me just $2,000 (after the first two MCAs were paid) at a cost off…$8,000 more dollars in interest. I didn’t sign the contracts, and instead resolved never to accept this kind of financing again.

What’s Wrong with an MCA?

The biggest problem with a Merchant Cash Advance is that it isn’t a traditional loan product. In fact, it isn’t a loan, at all. A Merchant Cash Advance is exactly what it sounds like: The financing company isn’t “lending” you money, in the traditional sense. Instead, what they’re technically doing is “purchasing” your future credit card transactions, in exchange for a lump sum up front. That’s why you don’t typically need good or even any credit to qualify for one; the lender simply wants to see financial records showing that you have a sufficient number of credit card transactions to make payback possible. They aren’t charging you “interest,” in the way a bank extending you a loan would…they’re purchasing more of your transactions, than they’re actually giving you in a lump sum up front. For example, a company might agree to “buy” $8,000 worth of your future sales, and in exchange, they’ll give you, say, $5,000. When you see it in black and white, this is obviously not a good deal. But when you’re strapped for cash and your weekly payroll is at risk, you’ll probably find you can talk yourself into almost anything. The downsides to an MCA don’t stop there, however.

Because an MCA isn’t technically a loan, it’s not regulated the way bank loans are. Bank loans, for example, usually are extended to customers at a fixed interest rate, with a limit to how high that interest rate can be. In a Merchant Cash Advance, there are no limits to how much the financing company can charge you for your quick cash injection. I’ve seen interest rates ranging from 28%, which is already madness, to 300% or more.

This lack of regulation also means that the MCA provider can add in exorbitant fees for things like returned or stopped payments. One contract I reviewed charged $300 for a returned payment, which makes those daily draws from your bank account suddenly become your highest priority, and a whopping $2500 if you were to try to get around your daily withdrawals by say, stopping payment with your bank. It wouldn’t take more than a handful of those to bury your business financially, and possibly permanently.

Finally, because an MCA isn’t a loan, borrowers have very, very little recourse for getting out from under them, in court or otherwise. Sign on for an MCA, and you’ll be making those payments, whether you’re able to, or not.

Warning Signs that an MCA or Business Loan Product is Too Good to Be True

In my conversations with multiple MCA sales reps over the last several days, I’ve identified a few things to watch out for, when trying to evaluate if a Merchant Cash Advance is right for you and your business:

A contract which reads, “THIS IS NOT A LOAN” in all capital letters at the top of the first page. This is almost a sure sign that you’re looking at an MCA, and also means you’ll be subject to the exorbitant interest rates and punitive fees outlined above. If you’re looking for a loan for your restaurant, don’t sign anything that says “This is not a loan” as its first order of business.

A good offer doesn’t expire.

A false sense of urgency. A reputable lender doesn’t have a time limit. I can’t tell you how many text messages I get each day, with some stranger telling me that they’ve secured me hundreds of thousands of dollars, but that I have to send documents that day, because the offer is “expiring.” A good offer doesn’t expire. A good offer will be just as good tomorrow. Pace yourself, take your time, and don’t respond to high-pressure tactics. A good friend of mine offered me a simple rule of thumb to consider when evaluating a potential lender. “Ask yourself,” he said, “Would a bank be behaving this way? Would they be chasing you and calling ten times a day and pretending that you have just hours to get a deal done? Would they be pursuing you, or would you be pursuing them?”

Weird terms that make it hard to pin down the interest rate you’re being charged. There’s a reason banks tend to offer loans with one, two, or five year terms. It makes it easy for you, the borrower, to figure out your actual interest rate, and figure out if the deal is right for you and your business. Most MCA lenders, however, frame their products in weird terms that make it harder to figure out what you’re actually being charged for interest. A finance company that’s offering you capital with daily repayment terms and a total financing term of, say, 7.5 months, is willfully trying to obscure what your rate actually is. Take the time to do the math, and you’ll be horrified.

A salesperson who gets too friendly, too soon, and starts making you lots of promises. “Hello my friend, how are you today,” is the surest way to get me to immediately terminate a sales call. A sales rep who assures you that he “only has the best interest of your business in mind,” doesn’t. And a salesperson who assures you that the terms he’s describing only apply to your first loan, and that you can refinance in 60 days or that he’ll get you better terms on your “next loan,” because he wants to build a “long term relationship with your business,” is probably most interested in building a long-term relationship with his commission check, without any regard for whether you’ll be able to pay the loan back or not, or whether doing so will be so disruptive to your cash flow that it interferes with the operation of the rest of your business altogether.

Excessively punitive fees for missed or stopped payments. As I outlined earlier, many MCA financing companies will put some insane fees in the terms of your contract, hitting you with fees as high as $2500 if you try to wiggle out of your agreement by stopping a payment with your bank.

Be Particularly Careful Not to “Stack” MCAs

In spite of the warnings we’ve already outlined, a Merchant Cash Advance can be a good option for, say, someone with no credit, who needs just a quick shot of cash and who can meet the daily or weekly repayment terms without disrupting cash flow too badly. The real danger with MCAs comes when you start to “stack” them, and are continually taking out more loans to cover previous loans. This is the surest way to dry up any available cash quickly, and can devastate your business. More scrupulous MCA lenders will check your bank transactions to see if you already have existing advances, and won’t finance you if you’ve already “stacked,” say, two or three. Many won’t care, and will stack another advance right on top of the existing ones. Remember, the provider of your MCA isn’t interested in whether your advance is good for you or your business; they’re interested strictly in whether or not you’ll be able to repay, even at the expense of all other aspects of your business failing.

What to Do If You’re Trapped in an MCA

In my story above about my experience with MCAs, my internal alarm bells began to ring just as I was about to accept a third Merchant Cash Advance, mostly to cover the payments on the first two. This snowball effect would, eventually, destroy my business. But if an existing MCA has left you with insufficient capital to continue running your business from week to week, what recourse do you have?

Do a quick google for “Stopping MCA payments” or “MCA relief,” and you’ll find a wide array of law firms, some of which may or may not be based in strip malls and finished basements, offering assurances that they can get you out of your MCA. Some may urge you to stop paying them, convinced that they can litigate your original agreement and get it thrown out. In some jurisdictions, this may be increasingly possible, as the laws surrounding MCAs are beginning to change. But be wary of any company that urges you to intentionally default on your agreement, particularly because if you do, you’ll have no choice but to hire their services to try and fix the mess you’ve created. You’ll also likely incur some insane fees from the MCA lender, who probably built some hefty penalties for this sort of action right into your contract.

I’ve heard stories from readers about some MCA companies suspending or reducing payments temporarily, for a period of 30 to 60 days, in order to give your business a little breathing room. Some have also been able to successfully “settle” or renegotiate their MCAs for a reduced amount. After all, the MCA company doesn’t want to go to court, either, and the more reputable among them might be willing to help renegotiate your terms to make them a little easier to live with. Your success here will vary widely, depending on who you’re doing business with.

Unfortunately, the best solution for getting out from under an MCA is probably not one you’re going to want to hear. Just pay it off, according to the original terms you agreed to. Most Merchant Cash Advances are for blessedly short terms; usually 8 months or less. That’s one or two seasons that you’re just going to have to tough it out, and get it paid. Consider applying with a more traditional lender to extend a line of credit to help ease cash flow concerns, if necessary, with a long repayment term you can actually live with. You could even run a promotion in your restaurant to raise capital some other way (such as offering discounted gift cards), and make those godforsaken daily or weekly payments until this is over and behind you.

And then, once it’s all over, think twice before ever doing it again.