MCA Loan: What It Is, How It Works

What Is a Merchant Cash Advance (MCA) Loan?

A merchant cash advance loan, or MCA loan, is a form of small business financing used to cover immediate expenses. A lender provides immediate financial assistance and, in return, takes a portion of the business’ revenue until the debt has been repaid. However, this kind of alternate business financing can be predatory, as businesses are essentially selling a portion of their future revenue for upfront cash.

How an MCA Loan Works

With this type of loan, your business receives capital from an MCA company. In exchange, the lender typically withdraws a percentage of your future revenue (plus interest and fees) from your business bank account on a daily or weekly basis until your debt is paid in full. Repayment periods vary by MCA lenders, ranging from three to 18 months.

How much you owe in future sales depends on the agreement between you and the company providing the cash. For instance, you might receive $50,000 upfront with the expectation that you’ll repay $65,000 in future receipts. Depending on repayment terms, your annual percentage rate (APR) could be in the hundreds.

Pros and Cons of MCA Loans

Pros Explained

• Lenient credit requirements: Since MCAs don’t have the same credit requirements as traditional business loans, the lender may not ask you for a business credit score or history. This might be helpful for new business owners who don’t have a score yet and need funding to cover startup costs.
• Quick access to funds: Since MCAs aren’t traditional loans, you don’t have to fill out the lengthy applications that banks and other conventional lenders may require. Depending on the lender, getting cash through an MCA might be easier and faster compared to other funding options.
• Flexible repayment: The better your business does and the more you earn, the faster you can repay your MCA.

Cons Explained

• Extremely expensive: MCA borrowers can be charged APRs in the triple digits alongside several possible fees. Repayment starts immediately, with the lender directly accessing your business bank account. It’s one of the most expensive forms of funding for smaller businesses.
• Little regulation: MCAs are legally considered cash advances, not loans, so MCA lenders aren’t subject to the same regulations as conventional business lenders. And because there’s not a lot of regulation, borrowers are at a greater risk of being taken advantage of.
• Deceptive and predatory: Because MCA companies aren’t regulated like traditional lenders, they can get away with several types of predatory behaviors. For instance, some engage in “stacking,” or offering a cash advance to a business that already has one to trap them in an endless cycle of debt. Other companies engage in coercive behavior to ensure they get repaid.

Risks and Considerations

Thanks to their less strict credit requirements, borrowers who can’t qualify for the best traditional business loans may benefit from taking out an MCA. However, because MCAs lack the same regulations as other forms of small business financing, these same borrowers are at a greater risk of being subjected to predatory lending practices.

Even if an MCA lender isn’t doing anything outright deceptive, you could still be taking a huge financial hit by working with them. Agreeing to give up a percentage of your future earnings means that the higher your profits, the greater the amount that the lender is able to withdraw. Compare this to a traditional loan with a fixed interest rate, wherein your monthly payments should stay the same regardless of how much money your business makes.

The Bottom Line

An MCA loan can help your company cover immediate expenses without the stricter requirements of traditional business loans. Due to its high APRs, taking out an MCA can be an expensive decision that may jeopardize your business' financial future.

Before getting an MCA, first compare it against more conventional forms of business financing to determine whether it’s the best option for you. You may qualify for something more consumer-friendly than an MCA. Additionally, consider consulting with a financial advisor for more guidance on your business’ specific situation.