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What is a MCA Loan? MCA (merchant cash advance) Loans, sometimes referred to as Cash Flow loans is a product that started a number of years ago, initially helping businesses in the retail sector who didn’t have A/R, or desirable inventory to get any type of business line of credit. Back then many of the lenders didn’t require UCC filings, and only intercepted the daily cash flow of credit card transactions swiping an interest and principal payment daily.
There are several very serious issues with these easy-to-get loans that business attorneys, accountants, and business bankers need to know, so they can help identify and counsel their customers about the best way to get the cash flow they are seeking. These cash flow lenders are the equivalent of pay day loans for consumers, but instead these are for businesses. The effective interest rate on these loans is 30-70% or higher.
What we have been seeing are customers who have an average of 3-7 of these loan types at the same time. Why the MCA Lenders don’t care that there are several other companies drafting monthly interest and principal payments from the same bank account I have no idea, but it is a recipe for failure for the business. Recently we have encountered several cases where this is happening. One business supporting $30K in monthly payments, another a 100K in monthly payments. It is insane and sad.
The first time the business owner gets one of these 250K loans in just 4 days it is a serious hit of adrenaline. But the totality of how destructive these loans are isn’t realized until they have returned for the 2 or 3 bump. Then they are in it so deep they don’t know how to get out of them.
Now here we are 10 years later and the bulk of these cash flow lenders all file UCC1’s against all business assets. They got smarter about protecting their investment, making it very difficult for us to unravel what the client has gotten themselves into.
Please be vigilant and aware of these types of loans. Some of the names you may recognize are: OnDeck, Kabbage, Kapitus, Bluevine, Funding Circle, Fundbox. If your client has one of these loan types it is indicative of a problem. A cash flow problem that may have a correct way to solve. Maybe they need an equipment loan, or an accounts receivable line of credit, factoring. They may need some help bringing the company back to profitability.
For the accountants, CPA’s, who are preparing tax returns for their customers who are losing money year after year, be proactive and make a referral to a good management consultant to help correct the issues. Preserving the client relationship by helping them avoid the mistake of borrowing more money to keep cash flowing the loses.
For the banker who is reviewing a customer’s accounts and financial statements. Look for these MCA names. If they have any, take some time with them to understand why. Are they experiencing frequent overdrafts? Are they unprofitable? These are great referrals for a good business consultant to come in and help identify the issues and make corrections sooner than later. It’s easier to preserve an existing business relationship than finding new customers to replace the failed businesses.
Call me if you are aware of existing clients that may need a helping hand. I am happy to help, and have been serving OR & WA for over 25 years. I can meet with the clients and figure out the best options and introduce them to the help they may need to fix their underlying problems.
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