Banks and alternative lenders can’t always be as fast and accepting as you need them to be. During the last decade, merchant cash advance (MCA) brokers have risen from obscurity and become a serious force in the business financing world. This news has meant a few things for business owners. There is reason to both celebrate and regret the rise of merchant cash advance brokers. However, the smartest thing is to just be diligent.
What To Expect With Most Merchant Cash Advance Brokers
Merchant cash advance brokers have become infamous for a few reasons. Before reading any further and hiring a broker, consider using a reputable marketplace instead:
| Lender | Minimum Revenue | Time in Business | Minimum Credit | Next Steps |
|---|---|---|---|---|
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$100K/year | 1 year | 600+ | See if you qualify |
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$10,000/mo | 3 mo. | n/a | See if you qualify |
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$10,000/mo | 3 mo. | n/a | See if you qualify |
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$75,000/yr | 24 mo. | 620+ | Request Intro |
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Varies | Varies | 560+ | See if you qualify |
High Rates
MCAs are not considered “loans” in the traditional sense. Instead of the interest rates you get on a normal business loan, an MCA will charge a factor rate, a rate represented by a decimal fraction. For example, an MCA for $100,000 with a factor rate of 1.2 would require a repayment of $120,000.
The thing with MCA factor rates is that they are usually very high. APRs of 150% are not only unheard of in the world of MCAs; they are fairly common. MCAs collect automatic debits very often, usually daily. The APRs that come with an MCA are so high that brokers will often avoid disclosing them. And because an MCA isn’t considered a loan, merchant cash advance brokers are not subject to the same requirements as other business financiers. They can get away with being sneakier.
Why Would You Ever Want A Merchant Cash Advance?
Despite the normal high costs associated with MCAs, there are many great things about them. While they are worse when it comes to cost, merchant cash advance brokers are superior to other business financers at a few things.
Unsecured
MCAs often require personal guarantees, so if you default on the loan your credit score is at risk. However, they are almost always unsecured. Without the need to put up collateral, you don’t need to risk personal or business assets to receive an MCA. MCA brokers assume the risk of the loans they provide. That’s a primary reason for their rates being so high.
Fast
Merchant cash advance brokers work very quickly. That’s a large part of why so many businesses choose to take an MCA. It usually only takes a few days to get an MCA, with some brokers sending you the funds in just one day.
The time it takes for a broker to send your funds is only half the story. MCA application processes are also typically very fast and simple. The paperwork requirements will never be any more difficult than those needed for business loans. In most cases, they are less serious.
Flexible
The repayment process for an MCA is based on how your business is doing. Because your repayments are fixed portions of each sale, if you’re getting fewer sales, you’re paying less in repayments.
Low Requirements
Lastly, MCAs don’t come with very stringent requirements. Of all the business financing options you have, they are among the easiest to qualify for.
The Shady Side Of The Merchant Cash Advance Brokers
We’ve looked at the good and bad sides of merchant cash advance brokers. Now it’s time to look at the ugly side.
Due to the less regulated nature of MCAs, some unscrupulous activities have been noted among MCA brokers.
Confessions of Judgement
Among the greatest downsides of some MCA brokers, there are “confessions of judgement”. This is something you should always look out for in an MCA.
A confession of judgement is a document that you must sign to get some MCA brokers to give you a loan. By signing one of these documents, you are waiving your right to defend yourself if the broker takes you to court. If the broker decides to take any case with you to court, you lose by default.
Criminal Behavior of Merchant Cash Advance Brokers
MCA brokers often take a different approach to getting payments from you if you default. These steps are often more personal and can cause you quite a headache. In extreme cases, MCA brokers have harassed and even threatened borrowers that have failed to pay them. These threats have included criminal acts in a few cases.
What You Can Do
With the good, the bad, and the ugly explained, it’s time for the verdict.
MCAs are a great option for some businesses. However, because of the reasons we’ve discussed, they must be approached with extra caution. Your due diligence must include a check on the backgrounds of any MCA brokers you are considering doing business with. The Better Business Bureau accredits some MCA brokers. So, you can check with them for accredited and highly regarded brokers.
If your search into an MCA broker reveals a history of harassment or false claims, you should, of course, steer clear of that broker.
Before you accept an advance, make sure you look carefully at the terms you’re being offered and make sure you have a solid plan for repayment. MCAs will eat away at your cash flow until you pay them off, so be prepared for the regular fees they carry.
Lastly, don’t sign up for anything you wouldn’t want to accept. Confessions of judgement and obscene factor rates should be avoided.
It is up to you to accept any loan or advance after doing your due diligence and after educating yourself. There are many downsides to MCAs, but the benefits can be exactly what you’re looking for if you choose the right broker.
