What is MCA?
Updated: Apr 11, 2019
If you are reading this article, you may have been seeking small business loans in the past and probably heard the term “MCA” a handful of times and wondered exactly what it is and why it’s gaining so much popularity in our recent decade. MCA, short for Merchant Cash Advance, is a form of an alternative business loan. It is simply an agreement a merchant makes with a lender to pay back the debt with a percentage of their future credit card earnings. The agreement basically states that the merchant is selling a percentage of their debit & credit card earnings to the lender until the payback of the advanced amount plus interest has been completed. In fact, more than ever before small businesses are turning to alternative lending solutions like MCA instead of going to major institutions like banks for traditional loans. One of the biggest reasons behind this trend is because ever since the economic crash of 2008, many small businesses owners are either turned down by the banks or must wait in line for several weeks or even months for the loans they desperately need.
Now, like many things in life there are pros and cons when dealing with MCA. The biggest perk with MCA is that the payments are much smaller since it’s only a set percentage of future credit card earnings and your business's cash flow becomes much more predictable. During the periods of time when your business is bringing more money, you will be paying more towards the payback... but at the same time, when the credit card earning are low then you will be paying back the lesser amount to the lender. Even though the payments will usually be made every day, for most businesses it will be much easier to make smaller payments rather than a larger sum each month. Another benefit of MCA simply comes down to ease of access to the money; if agreed upon the merchant can be funded with in 1 to 2 days. Instead of endless amount of paperwork such as long history of financial, business plan, proof of assets, credit and background checks that are usually necessary when getting a loan from a bank, MCA from a private lender will focus a lot of attention on health of the business and the revenue your credit card earnings bring. Of course, these private lenders will take in consideration of everything a bank would require such as the merchant's credit history but ultimately, even without a perfect credit score a merchant can be approved for MCA if their credit card processing can sufficiently handle paying back the debt.
The biggest drawback behind MCA lies in the fees and higher interest. Since MCA is not actually a loan, lenders can charge a much higher interest rate than traditional banks. Because of this, merchants should do their due diligence to make sure they are dealing with a reputable lender. Doing proper research on a potential lender is important but doing homework and calculation on the debt may be even more important. As mentioned before, the lender wants to make sure your business is not taking on something it cannot handle; of course, to protect their own interest. However, every smart business owner will do their own calculation to make sure that the debt is a potential opportunity rather than a risky venture.