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Merchant cash advance

How an MCA can leave your business DOA

How an MCA can leave your business DOA

Updated: Nov 17, 2017

So you’re ready to grow your business — congratulations! We know it isn’t easy to get your business to a point where you’re prepared to take on additional financing. But now that you’re exploring your options, it’s easy to become overwhelmed by the sheer variety. How do you pick which is right for your business? And which is actually most cost effective?

It can be hard to make an apples-to-apples comparison between two of the most popular options, a term loan and a merchant cash advance (often referred to as an MCA) — partially due to how their costs are structured. In fact, many MCAs specifically avoid talking APR, or their annual percentage rate, because they know it will make their product look more expensive. When you’re paying daily interest over just a couple months, the actual price you’re paying can skyrocket, and fast. It’s not unusual for MCAs to come out to 40%, 60%, or even over 100% APR when you calculate it out.

How to identify an MCA

Unfortunately, not all MCA-like lenders will out themselves as one because of the negative stigma that often surrounds the term. Here are a few telltale clues that you may be looking at an MCA:

  • They try to weasel around saying “MCA.” But they don’t call their product a term loan either. Common alternatives include referring to their product as simply an “advance,” “payday loan,” or “short-term cash solution.” These all usually mean the same thing: a lump sum you could find yourself struggling to pay off.
  • You make daily or weekly repayments. A dead giveaway for an MCA-like product is any payment structure other than consistent, once-monthly payments. And often, these payments are based on your transactions that day, so it’s difficult to plan for getting out from under this debt.
  • It won’t build your commercial credit score. MCAs rarely (if ever) report to credit bureaus, so you don’t build your business’ credit while repaying. Funding Circle helped create the Small Business Borrowers’ Bill of Rights because we believe you deserve an honest lending experience that will help your business grow and thrive.

But why are MCAs so expensive?

In short, MCAs cost so much for the same reason they’re so fast. They can get you the money in as little as one day because they have almost no requirements you need to meet. And while you and your business may be relied on to repay, they know that without any due diligence, not everyone will be. So you end up paying more to help them cover the others who end up defaulting.

At Funding Circle, we’re a little more discerning. While we don’t have the seemingly insurmountable expectations a bank might, we make every effort to lend to businesses that are reputable and show clear signs for growth potential. That’s why we’re often able to offer you great rates — because we believe in your ability to repay.

How MCAs can appear deceptive

Think tax season is confusing? Try figuring out how much an MCA really costs. We gathered data on some of the most popular MCAs and similar lenders to find out — and to be quite frank, even we had a hard time figuring it out.

MCAs rarely quote a straightforward APR, instead laying everything out in confusing fee structures. Between factor rates (we’ve seen some as high as 1.49) and a slew of administrative and other mysterious fees, it’s no wonder businesses have a tough time making heads or tails of what they’re really signing up for. Here are a couple things to look out for when considering an MCA:

Fees on fees on fees: Think you’re getting a good deal by sidestepping an origination fee? Think again. MCAs are wrought with additional fees, ranging from annual administrative fees just to manage your account to monthly payments on top of your regular repayment. Some MCAs charge a recurring fee, just for “servicing” your account! With fees sometimes calculated as a fraction of your outstanding balance (which can total thousands each year), it’s no wonder that businesses quickly find themselves in over their heads.

Sound confusing? We think so too. That’s why Funding Circle’s payment structure is simple and transparent. We charge you just one simple origination fee, and that’s it — period.

Quoting interest as cents per dollar: Not only do they not use straightforward terms (like APR) to discuss the cost, they don’t even do it all the same way! When a salesperson is explaining their interest rate to you as cents on the dollar, it sounds so reasonable — and affordable! But when this interest is annualized, costs skyrocket. Any reputable lender will be happy to help you calculate the APR — just ask.

Compare your options

Sometimes it helps to look at your available offers side-by-side. By calculating your potential APR with each option, it becomes much easier to see what the best choice for your business might be. We used one popular MCAs cost structure to create a comparison of what it might cost you. For example, if you wanted to borrow $100,000 for 1 year, your calculations could look like:

Amount requested: $100,000Funding Circle*MCA**
APR12.83%85.61%
Total repayment***$104,192$149,000

That’s not a typo — you could end up paying almost 100% APR!

The endgame

There are some rare circumstances where an MCA may be the best choice for you, particularly if you need the money tomorrow. A little planning ahead can go a long way, but we know that some things just can’t be anticipated — whether it’s a busted pipe at your office or a client who’s late on their payment, you might suddenly find yourself in a bind. However, for non-emergency business needs, you’ll want to avoid an MCA if you can.

To put it bluntly, MCAs are only a great solution when time is of the essence. If you can afford a few extra days, it’s well worth the time and effort to see if you qualify for a term loan instead.

[easy-tweet tweet=”Term loans may involve a bit more paperwork, but they could save you thousands.” usehashtags=”no”]

If you’re looking for short-term financing, be aware that there are term loan options that can help you bridge the gap, including Funding Circle. Our term loans start at just 6 months, so we can be flexible to your needs. We have no prepayment penalties — meaning whenever you decide to pay your loan off early, you won’t get charged extra! Plus, you only pay for the time you borrow, so you can save a ton in interest.

Think a Funding Circle loan might be the right choice for your business? Apply today — our simple online application comes at no cost to you, and you can explore your options.

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