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Merchant cash advance – the onus for caution is on you


If you want to see the bad side of the Merchant Cash Advance (MCA) business, it’s not hard to find it. On we have a whole section explaining this interesting area of small business finance, and there we clarify that there are definitely things you need to watch out for. If you do an internet search, you will find scores of “horror stories” about how the MCA industry is a scourge on all business, and even humanity itself.

From one point of view, there’s some truth in that statement. From another, it’s merely a case of small business owners not heeding the advice of “caveat emptor.” Both points of view have merit.

Let’s take the more positive viewpoint first. As we have written about in our Merchant Cash Advance article , many small businesses are simply not able to get cash financing through traditional business loans. MCAs can help in many of these cases. Because they fund you based on expected future sales, not current assets and credit rating, MCAs can often fund businesses that banks will not. The result is an innovative way of getting your business the cash it needs, when it needs it, and allowing you to pay it back in a flexible way.

If you aren’t familiar with how MCAs work, the short explanation is that the MCA funding company advances your business cash based on your expected future credit card receipts. Rather than being a loan, with a fixed payback schedule, the MCA company is purchasing the right to take a set percentage of your credit card sales until the agreed-upon amount has been paid. What’s great about this setup is that if you have a slow period in your business, you pay less.

As we mention in the article, the price of this kind of funding can be steep. But for the right business situation, it can be worth it. Typically MCA funders will tell you that the business and its owner will have zero liability if they can’t make the payments. But even if they tell you this, it is incumbent upon you to be sure this is reflected in the agreement you sign. Some unscrupulous MCA funders have been observed to send a contract that is quite different from what they have told you verbally. It is worth paying a few bucks to a lawyer to be sure you know what the contract really says.

It is these unscrupulous companies that you can find so many negative stories about. They sneak clauses into the contract that allows them to go after the business owner’s assets if the business is not able to continue making payment. And even worse is when they include what is known as a “confession of judgement,” a legal action that can freeze a merchant's bank accounts and require the merchant to admit liability automatically when the lender sues them.

A deeper dive into confessions of judgement will be the topic of a future post, but we’ll suffice to say that you don’t want to find yourself on the wrong end of one. And while this kind of sneaky behavior on the part of an MCA funder is certainly despicable, it is not entirely unsurprising. Business owners who need funding and don’t have access to any other source are a relatively easy target. Most are not lawyers and don’t want the time and expense of having a lawyer look over such an agreement. Unscrupulous funders know all of this, and they can take advantage of it.

So we will repeat, do not enter into an MCA funding agreement without having a crystal clear understanding of what you’re agreeing to. Even if you feel you have no other choice than to accept the expensive money that comes via MCA, it may be better to lose your business than to have your personal assets seized. And there are many MCA funders out there, most of which do not engage in such horrible behavior. If the MCA contract you have been presented is out of line, keep searching for one of the funders that doesn’t lie about key points such as liability.

Do not let a few bad apples spoil the whole bunch. And absolutely do not let a single bad apple spoil your personal and business financial life. It’s just not worth it. Caveat emptor. Please.