Beware of Merchant Cash Advances

While a merchant cash advance (MCA) gives a business quick access to working capital, there are a number of disadvantages. The cons of MCAs include:


MCAs Are Not Regulated

Outside of some disclosure requirements that have been enacted in California, MCAs are not governed by lending laws such as the Truth in Lending Act (TILA). Because a cash advance transaction involves the purchase of future revenue, it is not considered a loan. MCA providers typically make advances with exorbitant retrieval rates and business owners often experience receivable shortfalls. Since MCAs are not regulated, they are often enforced through confessions of judgment and personal guarantees, which puts both business and personal assets at risk of being seized. 


MCAs Are More Expensive Than Business Loans

Because the term of a merchant cash advance is usually less than one year, MCA providers are not bound by regulations on interest rate governing traditional lenders. As such, MCAs are far more expensive than other loan products. When the factor rate quoted by the MCA company (usually ranging from 1.2-1.5) is converted into an annual percentage rate (APR), business owners may be facing a rate between 60 and 200 percent. 


Shorter Repayment Periods

While cash advance repayments may involve daily deductions over terms ranging from 90 days to 18 months, MCA providers typically require repayment within 6-to-9 months, which can be a disadvantage for a business seeking the maximum repayment period. 


Restrictions on Business Operations

MCA agreements often include restrictions on how the business can operate, such as: 

  • Discouraging customers from paying with credit cards
  • Offering special discounts to customers who pay with cash
  • Prohibiting the business owner from switching credit card processing companies during the repayment period
  • Prohibiting the business from taking out other business loans until the cash advance is paid


The fact that an MCA agreement is a purchase and sale transaction means that the business owner is bound by the terms of the contract.


Why This Matters

While a merchant cash advance offers business owners with quick access to working capital, this type of short-term financing can also evaporate cash flows. On the other hand, MCA agreements typically include reconciliation clauses that allow for the payment terms to be restructured. 

If your business is at risk of defaulting on a cash advance, Access Community Capital is one resource that may be able to help.  It may be possible to negotiate with MCA providers to reconcile cash advances.