If you run a small business, chances are you’ve heard about merchant cash advances, or MCAs. They can be a quick way to get funding when you need it. But they can also get you in trouble fast if you don’t know what you’re doing.
That’s why I put together this guide – to help business owners like you understand MCAs and avoid issues. I’ll explain how they work, pros and cons, legal considerations, and more. My goal is to give you the info you need to make smart decisions for your biz. Sound good? Let’s dive in!
-What is a Merchant Cash Advance?
OK first – what is an MCA, exactly? Basically it’s a short-term loan where the repayment comes from a percentage of your future credit card and debit card sales. You get a lump sum up front, and the lender takes a cut of your daily revenue until it’s paid back. There are no fixed monthly payments.
This flexibility seems great, right? But it can also get merchants in trouble when sales drop unexpectedly. If your revenue goes down, your daily repayment doesn’t drop – so you end up paying back a huge chunk of reduced sales. Not ideal.
How MCAs Work
Let me break it down a bit more…
- You get an upfront lump sum, usually between $5K – $500K
- The lender takes a % of your daily credit/debit card sales as repayment
- Payments fluctuate based on your sales – no fixed monthly amount
- The term is usually 6-12 months until repaid in full
Seems simple enough. But you need to be careful. Here are some key things to know…
-Pros of Merchant Cash Advances
- Fast funding – usually within a week of applying
- No fixed monthly payments – repayments scale with revenue
- No collateral required – unsecured funding
- Flexible terms – pick your ideal repayment percentage
- Poor credit OK – based on card sales, not credit score
- Keep using your cards – no need to switch processors
Cons of Merchant Cash Advances
- Very high interest rates – often over 100% APR
- Can drain your daily revenue fast if sales drop
- Repayments don’t drop when your revenue does
- Aggressive collections if you fall behind
- Recourse – personal guarantee usually required
- Expensive to refinance once signed up
As you can see, there are some big advantages but also considerable risks. Tread carefully.
Common MCA Company Abuses
Unfortunately, many MCA lenders engage in predatory practices that take advantage of small businesses. Here are some shady behaviors to watch out for:
- Quoting super high repayment rates that crush your margins
- Taking daily debits that drain your bank account
- Harassing nonstop calls from aggressive collectors
- Getting you to sign confessions of judgement for easier asset seizures
- Strongarm tactics to collect if you fall behind
- Hiding terms in the fine print
- Misrepresenting repayment amounts
Not all MCA companies are evil. But many are extremely aggressive in getting their money back. You need to protect yourself.
MCA Legal Considerations in California
Now let’s talk about some of the legal issues surrounding merchant cash advances. There are a few key laws and regulations you need to know:
California Finance Lenders Law (CFLL)
Many MCA lenders get licensed under the CFLL, which governs lending activity in the state. This allows them to bypass usury limits on interest rates.
-Usury Limits
In California, the maximum allowable interest rate is generally 10% APR for loans under $2,500. MCA loans often far exceed this. But lenders claim they are not technically “loans” in order to avoid usury.
SB 1235
This new CA law requires MCA lenders to provide certain disclosures about rates, terms, potential liability, etc. It’s a start, but more protections are needed.
Unconscionable Terms
Some MCA contracts contain such unfair, one-sided terms that they become legally invalid. A skilled attorney can get them thrown out.
-Confessions of Judgement
These allow the lender to seize your assets if you default. They’re banned in CA but some lenders still sneak them in.
What to Do if You Have an MCA
If you already have a merchant cash advance, here are some tips:
- Review your agreement closely – know the terms inside out
- Build up reserves if possible to stay on top of payments
- Talk to the lender right away if you anticipate any repayment issues
- See if you can renegotiate the repayment percentage
- Avoid signing any new confessions of judgement
- Contact an attorney immediately if you receive threats or harassment
The most important thing is to act quickly if you fall behind on payments. Ignoring the problem won’t make it go away – it will only get worse. Be proactive.
Fighting Back Against Predatory MCA Lenders
If you realize you’ve been taken advantage of, it’s not too late to fight back. An experienced attorney can help you get relief through strategies like:
- Proving usury violations
- Filing breach of contract claims
- Invalidating unfair contract terms
- Proving fraudulent inducement
- Seeking damages for harassment/abuse
- Negotiating a favorable settlement
Don’t be intimidated by aggressive collection tactics. You have rights. And you may be able to get the contract thrown out completely. Fight back.
Should You Get a Merchant Cash Advance?
Here’s my honest advice after seeing many MCA deals go bad:
Proceed with extreme caution. MCAs can provide quick funds when used carefully. But they come with big risks. Examine all options before choosing an MCA.
If you do go the MCA route, work with an attorney to review the contract. Negotiate the best possible terms. And have a plan to cover payments if sales decline.
MCAs can be helpful. But they can also destroy businesses if not managed properly. Educate yourself and get professional advice before moving forward.