Are you Considering that Second Merchant Cash Advance Loan? Think Again!

While many businesses are going through unpredictable cash flow issues, going down the Merchant Cash Advance (MCA) route may be a simple and widely available solution. However, most of the time ends up depleting cash flow faster than planned causing the business owner to seek a second MCA that is no longer a viable solution.

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While many small short-term loans like MCA’s may fit some business models, it is my opinion that they are usually not enough on the first round, too expensive, too short of time to pay back making the payments unaffordable. 
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The MCA Industry Is Going Through a “RESET” 

The MCA industry has recently been taking a beating on defaulted loans and they are resetting underwriting parameters. This may include backing out of some industries, regions, and non-performing business profiles. The data is coming in faster than they are able to adjust so it will be interesting on how all this unfolds by the end of 2023.

Consider Your Net Profit Before Applying

While the average cost of an MCA loan is 30% for 6 months (60% Annual Interest Rate) and sometimes higher or lower depending on your business model and credit score, you should ask yourself if your business can generate enough net profit with this cost built into the payback amount. The second question is if this loan will generate enough revenue stream to keep up with the daily or weekly draws. 

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It is my experience that the first loan usually takes out most of the net profit and the second loan stacked begins to tank the business. Let’s not even mention the third, fourth, fifth and sixth stacked loan that I just recently reviewed from an applicant looking to factor receivables.

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I don’t understand some of the underwriters that are pumping out MCA loans to business owners that obviously will not be able to pay back. It reminds me of the Airplane Pyramid Scheme the way they are stacking these loans one behind the other and inevitably the last ones in will lose out including the business owner.

If You Sell on Credit Terms, You Should Factor Your Receivables, Not Cash Advance

If your business is selling on credit terms, an MCA is the WRONG financial instrument. If your business has unpaid invoices from credit worthy clients then invoice factoring is the most affordable and viable solution. A factoring company will Purchase your invoices on an ongoing basis as if you were selling on “Cash on Delivery” to customers. It is not a loan and you do not pay for it with money out of your bank account. The factoring credit line grows proportionately with your sales and is unlimited. The approval is simple and it is based on the credit worthiness of your customers, not your company.

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This article has been written by Raul Esqueda, President of 1^st Commercial Credit, LLC and provides invoice factoring services to businesses nationwide.