Contrary to the popular pop tune about how fun it is to stay at the YMCA, if your small business needs an infusion of quick cash, an option you might try to steer clear of is an MCA. The MCA, short for Merchant’s Cash Advance is “designed around taking an upfront, lump sum loan of cash for agreed-upon repayment terms based on a factor that’s like an interest rate,” says William L. Treciak, president and CEO of Electronic Data Payment Systems in Granville, Ohio.
According to Treciak, repayments of MCAs used to be based exclusively on a business’s credit card receipts. Today, however, they are based on sales receipts deducted from a company’s daily bank account balance.
While one of the advantages of an MCA is that little paperwork is needed to get one, meaning, if successful, the infusion of cash is quick, this foray for fast money has several drawbacks. First, they are outrageously costly. The APR for one could actually hit the triple digits.
There is also no federal oversight of an MCA, since the merchant cash industry is not subject to federal regulation. Instead, it is governed by differing laws in all 50 states embedded in each jurisdiction’s Uniform Commercial Code. In addition, an MCA provider can pull the personal credit report of a business owner seeking such a loan. “It’s an inquiry on a credit score, so it can impact it,” says Treciak.
With all its downfalls, why would a business owner ever consider obtaining an MCA? There are limited situations when they are the best choice, but that would only be after all other options are exhausted, says Treciak.
Those situations include:
- Poor credit
- Limited financial alternatives
- An immediate need for capital
- An abbreviated financial history, perhaps due to the owner’s brief entrepreneurial tenure
One alternative is selling the company’s account receivables because, says Treciak, “that would be less expensive.” However, it would probably take longer to get the capital, diminishing its allure to entrepreneurs needing fast cash.
Treciak touts what he calls a completely underused and attractive method for business owners seeking funding: The SBA 7(a) Low-Doc Loan. He says they are fantastic options that are “amazingly under-utilized loans.”
He likes them because they don’t require a great deal of paperwork but are designed for a “pretty quick” loan. They can also be used for virtually any business-related use, so they are business-friendly.
Tami Kamin Meyer is an Ohio attorney and writer who tweets as @girlwithapen.
