You own a small business, but accounts receivable are piling up. It seems that everyone is a “slow pay” these days, but your business needs working capital to operate- and it needs it now. Your banker wants more collateral, and he will not accept your accounts receivable for that purpose, so what is one to do?
The “answer” for many struggling businesses has been a new entry in the field of finance – the Merchant Cash Advance, or “MCA,” for short. Bankers may have fled from the small business community due to credit risk, but there is ample investor cash on the sidelines looking for better returns even when risk profiles are high. This new funding source, however, is expensive and may not be suited for your business model, such that extreme caution should be exercised before heading down this funding path.
What is an MCA? In most cases, it is tied to your daily credit and debit card activity with your merchant processor, although many providers have expanded into making these advances available on an unsecured basis to qualifying small businesses. Technically speaking, these advances are not loans, do not fall within fair credit law dictates, and are for the most part unregulated. Depending on your weekly billing history, a portion will be advanced for your use. A factor from 20% to 50% or higher is added, and then the total is collected ratably over an agreed upon time period from your daily receipts.
If it works for you, this funding source can grow with your business, but experts warn prospective applicants to be cautious; “Next to borrowing from Tony Soprano, MCA’s are very expensive and often have repayment penalties that prevent the borrower from getting out of a difficult situation.” The industry arose five years back when banks departed the scene. Usury complaints and unfair business practices have subsided to some degree, but here are a few tips to follow before jumping into this:
- First, read up on the funding method and become familiar with what it is and how it works. Internet search engines can direct you to a host of articles and independent testimonials on this topic. The North American Merchant Advance Association website is a good place to start. It was formed in 2008 to “set ethical standards for the industry”.
- Does your business model have quick turnover and high margins to support the high costs of this funding option? For example, a $20,000 advance might carry a 20% fee and require a $2,000 payback over twelve months in a best-case scenario. This interest-rate tab computes out at a 40% rate, and higher still for shorter payback periods, which are more common. Does your business have the capacity to generate the necessary margins to cover this expense and remain profitable? Experts once again counsel, “With this short repayment period, a majority of the company’s credit card revenue is deferred to pay back the loan instead of being available to cover operating expenses.”
- This option should not be viewed as a long-term alternative. It is designed for an immediate need. You need to get in and get out quickly. “MCA companies are great at offering to loan additional money to borrowers based on the increase in monthly credit card transactions or when a loan matures. It is very easy for a company to fall into the trap of continued borrowing from an MCA when it may no longer be necessary.”
MCA’s are the latest funding option to hit the market, but proceed with caution and understand your risks before committing.
Ms. Bekiroglu is a published freelance writer and editorial consultant for www.mobilepaymentgeek.com. After receiving a Bachelor of Arts degree from the University of South Florida, she became determined to eliminate her student loan debt, thus becoming very knowledgeable about money management. Now she seeks to educate others with tips in both personal and business finance.