A merchant cash advance or MCA is a relatively new form of commercial lending where a retailer receives a lump sum amount in exchange for a cut of its per-day sales.
The borrowed amount is repaid in agreed-upon percentages of a business’s receivables over 6 to 12 months. But many times, borrowers fail to settle the borrowed amount within the agreed span. And a single default may lead to an endless cycle of debt.
Eventually, the debt overgrows a company’s capability, threatens to kill it, and leads to asset seizure. Chris Fann, an owner of a small fleet of trucks, is a victim of such circumstances.
“I was losing money last winter, as operations slowed down, and my weekly MCA payments went way over $64,000.” Fann lamented.
Fann Transportation has been struggling with MCA debts for the past eight months. By May, he’d lost all his trucks and depended on other operators to keep his company running—all thanks to a debt that had piled up to $300,000.
But Fann is not the only one sinking deep in debt. Surveillance from RigDig, a data company for the tracking sector, indicates that, over the past five years, thousands of trucking-sector companies have used a cash advance in times of financial need.
Pre-corona, MCA lenders were luring small-fleet entrepreneurs and other micro-businesses seeking finances to survive storms or seize expansion opportunities.
According to a study of Overdrive readers, 3 in 4 interviewed business owners said they were “totally shut down.” Many of the subjects were independent owners managing fleets of less than ten trucks.
Most of these firms had very little to no backup funds pre-corona, and most offer services to sectors that have virtually closed up, which has affected rates significantly.
All these challenges meant financial difficulties for company owners looking to break even. Meanwhile, phony lending firms saw the opportunity to prey on a suffering group of merchants.
“We’ve heard horror stories,” says Brock Blake, Chief Executive of Lendio, a web-only micro-business loan platform that matches businesses including small-fleet firms, with Cash Advance providers and other lending companies.
The worst is when a business and its owner lose almost all their assets, it ends in frozen bank accounts, or a Cash Advance lender deducts finances without the business owner’s notice.
According to Blake, many of these nightmares happen when the lender fails to lay down all rules regarding MCA terms and fees—or the borrowing merchant did not familiarize themselves well with it.
What does that mean?
Quick and efficient as MCAs may seem, most of them have unfair fees and terms that a business may not see when entering the deal.
Scrutinize fees thoroughly and remember; “most MCAs are high-interest loans with very short repayment terms,” so you want to be very careful.
Author Bio:- Michael Hollis is a Detroit native who now lives in Los Angeles. He is an account executive who has helped hundreds of business owners with their small business cash advance bad credit. He’s experimented with various occupations: computer programming, dog-training, scientificating… But his favorite job is the one he’s now doing full time — providing business funding for hard working business owners across the country.