The MCA company decides how high the factor rate will be based on reviewing bank statements which will show the number of monthly deposits, how much those deposits were for, how many days they did not receive any deposits and how many other advances the merchant has.
The MCA company also looks at how long the merchant has been in business for and what industry they are in. The higher the risk, the higher the factor rate.
Merchant cash advances can be very expensive. Not only is the interest rate often very high (and difficult to figure out), but there are often hidden fees that can greatly increase the amount that a small business is expected to repay this can eventually lead the business owner into debt or default.
Yes, and defaulting on Merchant Cash Advance Loans can be especially detrimental to a business and could result in lawsuits, judgments and liens from the lender as well as negative credit reporting. It could put you out of business.
You may think that you can then pay this loan off with the next job, sale or receivable that comes in, but this is not always a reliable or a realistic solution.
Too often this thinking ends up making things worse for your business, with frozen business accounts, debt, liens, lawsuits and judgments.
Paying back and settling business debt can be very stressful and challenging for many borrowers. The Business Debt Law Group can help make arrangements with creditors and lenders for our clients to ensure that you make the necessary payments while also keeping your doors open. Your main goal as a borrower is to avoid filing for bankruptcy and closing your business.
The History and Harms of MCAs
Many people think that the aftermath of the financial crisis in 2008 is when merchant cash advances came to rise, but that is incorrect.
In 1998 a company called AdvanceMe (now called CAN Capital) pioneered the splitting of credit cards. AdvanceMe was monopolizing the merchant cash advance industry because they owned the patent on split-funding (known today as merchant cash advance).
Initially merchant cash advances were byproducts to selling credit card processing point of sale systems. Right before the financial crisis when the split-finding patent was invalidated, companies began to focus solely on funding advances.
When the economy took a downturn in 2008, it was one of the only sources to get funding for your business and this opened the floodgates. Merchant cash advances are now said to generate $5 billion to $10 billion in loans every year.
Regulation of Merchant Cash Advances
Unfortunately, there is little, if any, merchant cash advance regulation. MCA’s are not considered a loan and there is no federal oversight of the advances. They do not fall under any state usury laws.
MCA’s have been known to carry annual percentage rates – the total cost of a loan, including all fees – sometimes over 300%. Many would claim these advances to fall under the definition of predatory lending. These exorbitant fees can cause serious cash flow issues for merchants.
Many times merchants are forced into a vicious MCA debt trap, having to get advance after advance because they can’t afford to pay back the prior MCA’s they received.
Additional Risks of an MCA Loan
You may expect to receive more phone calls from brokers trying to get you to take out more advances. In a process called stacking, other MCA funders may contact you to try to get you to add new advances on top of your existing one in a gambit to get out of debt.