We talk about merchant cash advances a lot. Our clients do too, because so many of them have been burned by these not-quite-a-loan financial products. Taking out a merchant cash advance when your cash flow is pinched can be the “help” that ultimately bankrupts your business. That’s not an exaggeration; there are plenty of MCA horror stories on the Internet, and we hear them everyday from prospective clients looking for a way out.
When someone who has been burned by a merchant cash advance before comes to Mobilization Funding, one of their first questions is, “How are you different?” We are happy to share exactly how we compare with “quick cash” MCAs.
Lender Versus Broker
In most instances, you don’t purchase your MCA from the lending company. You get it from a broker. This is the guy or gal who calls your business promising “quick, easy cash.”
When a broker sells an MCA they add their own markup to the deal, as much as 10% of the loan’s value. That commission becomes part of the total cost of your loan, which, in a way, means YOU pay the broker for the service of delivering you to the MCA company.
We don’t use brokers. We have strategic partners—people and companies who align with our purpose and values. When a referring strategic partner, like a factoring company, brings a client to us, we don’t tack a commission for the referring company on to YOUR loan. We send them a referral fee and a thank you, because that’s how we believe business should be done.
Basis of Funding
Merchant cash advances are basically an advance on future sales or receivables. The funding you receive is based on the average amount of cash flowing through your business’ bank account on a monthly basis (and your credit score — we’ll talk about that in a minute).
The trouble with the MCA’s basis of funding comes when a majority of the cash that comes into the business isn’t profit. If you are a commercial roofer, and your monthly cash flow shows $250,000, but you pay $100,000 to suppliers and vendors, and another $75,000 in payroll, guess what? The MCA company only cares about that first number.
We base our loan on your contract or purchase order. We sit down with every prospective client to map out the weekly cash flow of the project and review their expected margin. It’s important to us that (1) the work gets done, (2) our client succeeds and builds on that success, (3) we get repaid.
By putting people and performance over profit, we can protect our business AND our clients. That’s something merchant cash advance lenders just can’t say.
We don’t check your personal credit. Merchant cash advances do; they have to, because they base their approval on it and if your business defaults, they want to be able to come after your personal finances as well.
Worse, if a broker is shopping your advance around to several lenders, they can each run your personal credit report. The inquiries alone can negatively impact your credit score.
Cost of Funds
Merchant cash advances do not have “interest” rates. Instead, they have a “factor rate” applied to the loan. The factor rate is a percentage of the borrowed amount, and the percentages vary widely from high single digits to as much as 50 percent or more. That is why a $200,000 merchant cash advance on average is almost three times the cost of a Mobilization Funding loan.
Look at that chart again. Merchant cash advances are almost always sold with a daily or weekly debit from your account. That debit typically starts right after funding is received (the next day or possible the next week). A daily debit from your account might be fine if you are a popular restaurant or retailer, but it is almost always a problem for construction and manufacturing companies. Your cash flow cycles simply do not support a daily debit and likely even a weekly debit.
In construction and manufacturing, businesses wait to be paid between 30 and 90 days after they submit an invoice or pay application to their customer, typically at least 30 days after some portion of the work has been completed. That means contractors and manufacturers are perpetually in need of cash to mobilize on each new project, but won’t be paid for the work for at least 60 days. That is not a cash flow cycle that can support a daily, or even weekly, draw on your bank account.
Our CEO Scott Peper puts it like this, “If you have money coming in daily, you may be able to handle a daily debit. If you don’t, you can’t.”
MCAs are based on future sales at a pre-determined factor rate, so it’s actually more expensive as it relates to an annualized interest rate to pay them off early and no benefit to you. (It is possible, but very rare, to find an MCA that offers a lower rate for paying it off early.)
Merchant Cash Advance or Mobilization Loan?
The answer is clear.
We put a purpose behind our business, “to help those we come in contact with.” If our loans aren’t the solution to your needs, we will help you find the right loan provider. If you have questions about how our loan works, we will answer them openly and honestly. (We have several videos on our YouTube channel addressing common questions about our loan program.)
It is our goal to arm you and every member of our community with the information you need to make smart, strategic decisions. When it comes to merchant cash advances, the smart decision is to avoid them at all costs.