The Dangers of Merchant Cash Advances (MCA)
The speed at which you receive your funds is incredibly important. Here at Steelhead Finance, we want to help mitigate any scenarios that may hinder the growth and longevity of your business.
Steelhead has recently seen an increase in alternative financing companies in the marketplace, often referred to as a Merchant Cash Advance (MCA) or a Business Cash Advance. These vendors offer access to quick cash. We want to share with you how utilizing that type of business practice could negatively impact the factoring relationship and your business overall.
What Happens to Factoring if I Take Funds From an MCA?
If you sign an MCA Loan Agreement while already engaged in a factoring agreement, this would cause a default of your factoring agreement. A default means factoring funding would immediately stop.
Merchant Cash Advance Loan Issues
If you take on an MCA loan, the MCA will generally debit the loan payment directly from your bank account on a daily or weekly basis. Should you inadvertently miss a payment or have insufficient funds in your bank account, the MCA may immediately debit ALL money from your account in an attempt to be paid back in full. This action would leave you unable to pay your drivers, fuel bills, truck payments, and more.
Another step MCA companies will often take if a payment is missed is to maliciously attempt to redirect payment on your factored invoices. In the event they do this, the factoring company may be forced to hire legal counsel to be paid what is rightfully theirs, adding another cost to the you on top of trying to work through the cash flow and legal situation caused by the default to the MCA.
These extreme tactics may be due to the lack of regulation for this type of lender.
Why Factoring is Still the Better Option
When you need to capitalize on quick funding from your invoices, the factoring benefits are clear:
- Factoring will typically involve less risk to you than an MCA loan – MCAs charge based on your “projected” sales, which could cause you to borrow more than you’re reasonably able to pay back, while factoring turns your existing invoices in to cash.
- Factoring utilizes terms that match the life of the assets being financed.
- Factoring offers useful back office services that MCA companies don’t.
- Fees or interest charged by an MCA may reach up to the amount of the original loan while factoring fees are only a small percentage of an invoice including valuable services above and beyond just cashflow.
If you have any additional questions regarding the repercussions of using a Merchant Cash Advance loan, please contact your Relationship Manager – 800.727.3377.
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