Have you heard of payday loans? You’d never consider such an option because it’d drain your resources, right? Merchant cash advance and business cash advances are like payday loans except they target businesses.
Thousands and thousands of business owners are stuck with MCA. To attract B2B companies, some MCA providers call it Business Cash Advance. An MCA may sound like a great idea, but it isn’t when you look at the full picture of how it works.
Here’s a true story. A business owner tells them he needs $200k. They say they’ll advance him the $200k, and then take out a percentage of his daily deposits for the next 24 months.
He’ll finally have the working capital he needs.
All’s right with the world, yes?
The problem with merchant cash advance
Did his business really get $200k?
Here’s what happens.
You get the full $200k in your account.
The MCA provider removes a percentage of your loan amount, which is $800 in this scenario. He no longer has $200k. He didn’t even get to decide what to do with it yet as he has started paying back the business cash advance.
Another $800 is removed from his account.
Day 150 (not even halfway through 24-month loan)
MCA has withdrawn more than $100k. Has his business made enough money to cover that AND use the original loan for whatever he needed it for?
How much will have this small business owner paid by the time 24 months is up? It’s $584k, more than double the loan! That’s more than 50 percent interest!
In the 1930s, this was called loan sharking. Instead of breaking legs, business cash advance providers can bankrupt a company, or start a vicious cycle as it’d need another MCA loan to keep up with the withdrawals to make up the cost of the original loan. Once you start using MCA, it’s hard to stop.
Of course, the MCA provider will give you a second loan, a third, and so on.
Ending the merchant cash advance addiction
If you have business cash advance buyer’s remorse and you want to end the MCA addiction, you can do this with invoice financing. You may have heard it referred to as factoring and accounts receivables financing.
Unlike a bank loan, line of credit, or MCA, factoring isn’t a loan. Instead, it gives you the money you already earned.
OK, why would you need help getting the money your clients owe you?
You may not need help. But you do need cash now. Typically, clients take 30 days to pay the invoice. Because of the MCA, 30 days is too long to wait. To top it off, some clients take 60, 90, or more days to pay what they owe you.
How much time do you spend contacting clients to collect what they owe you? That’s time you could be spending on generating more business. You need more business now as you’re dealing with paying back the MCA.
Working with a factor gets you the money faster and saves you the time you waste in chasing payments.
How invoice financing cures MCA addiction
It’s understandable to be skeptical considering what you’re going through the MCA. The catch is that the factor buys your invoice at a discount and takes on the risk of nonpayment. In this scenario, you don’t owe anyone money. The factor will owe you instead. Once the factor collects payment from your client, it will give you the rest of the money it owes you.
Invoice financing is a more affordable way to get working capital as fast as with an MCA. Except with invoice financing, you don’t have withdrawal symptoms or any other negative side effects that come with an MCA.
Image credit: 1970 Lincoln Continental