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Merchant cash advances, or MCAs, are loans that business owners usually look to in a crisis. Think of them as the equivalent to the business version of a paycheck advance loan with high interest and repayment terms that often do not align with what is best for the business. MCA’s are dangerous for most merchants but horrible for construction businesses, and we’ll explain why in this four-part blog series.

In our introduction to merchant cash advances, we will explain what a typical loan looks like and how the fees and costs are charged.

How MCAs Work

The basic requirements to qualify for an MCA are to submit an application that includes a business owner’s personal credit, social security number, business name, business address, and other simple information. Along with this application, they will submit four months of bank statements. Once the MCA lender gets those statements, they can evaluate the money this business receives through deposits. The MCA lenders may utilize different metrics, but they all end up with similar results. That result is that the loan or the advance amount they offer the business is close to the average amount of deposits the company has rolling through their account monthly.  

For example, a business has an average of $200,000 in deposits. The lender will build out a repayment schedule for that $200,000, typically with a repayment period between six to twelve months. Before calculating the repayment period, the MCA lender needs to determine the “Factor Rate” they will charge for the loan. This Factor Rate will be the actual cost of the loan to the business. Factor Rates can vary depending on the company, business owner’s personal credit, industry, and other variables, but is typically between 35-50% for construction contractors.

So, with a quick math example, if an MCA lender gives a business $100,000, and the factor rate is 40, the company will repay them $140,000 over the loan term. If that term is 12 months, the interest or fees charged annually is 40%, but if the term is 6 months, the actual annual rate is 80%. 

To determine the daily or weekly payment amount, the number of business days in the given period needs to be calculated (a typical month has 21 business days). If it’s a six-month term, they will take the $140,000 and divide it by the number of business days in that period.

6 months x 21 business days per month = 126 business days

$140,000 repayment / 126 business days = ~$1,111.11.  

Now, $1,111.11 is the daily number that businesses will have deducted via ACH from their bank account. 

Dangers of High-Interest Rates

These factors are a fixed fee or margin that businesses must pay back in addition to the amount they were advanced on the loan. One obvious issue is the loan is very costly in its short-term structure. Secondary to the cost, this loan is based on future receivables (the deposits they receive in their account), whether businesses receive that money or not. So, if companies don’t have enough future revenue to support the dollars they’re borrowing, it can be problematic when those loans need to be repaid—on a daily or weekly basis.

If you’re feeling stuck with payroll and vendor invoices, give us a call before resorting to a merchant cash advance. We’re here to help — (813) 712-3073

Click here to read part 2 of 4 of our Dangers of Merchant Cash Advances series.

Merchant cash advances, or MCAs, are loans that business owners usually look to in a crisis. Think of them as the equivalent to the business version of a paycheck advance loan with high interest and repayment terms that often do not align with what is best for the business. MCA’s are dangerous for most merchants but horrible for construction businesses, and we’ll explain why in this four-part blog series.

In the second part of our series, we’re going to dive into the many ways businesses get hurt by taking out merchant cash advances.

The Repayment Structure of MCA Loans

Problem #1 – Typically, MCA lenders will require a daily or weekly payment that is automatically debited from the borrower’s account. Usually, construction companies are paid 30-60 days from when they invoice for work completed. So, a daily or weekly MCA repayment structure becomes a real problem quickly. It is always worrisome if revenue streams don’t match a payment plan when taking on debt.  

Problem #2 – The price of debt to the amount of time to repay the loan AND the margin of the overall business. If a company sells its future receivables at a higher factor rate or at a higher dollar number than it makes in margin on sales, it will have an even bigger problem. 

For example, an MCA lender approves a construction business for a $100,000 MCA loan, and the terms of the loan require the business to pay back a total of $140,000 (a 40% factor rate) in a twelve-month period. Let’s assume that the construction business works off a typical 20% gross margin. Now when the business generates $100,000 in revenue (the amount they just borrowed), and they only make a 20% margin, they will actually need $200,000 in revenue to generate enough margin of $40,000 to pay back a $100,000 loan. This example also assumes they remain disciplined enough to use the $100,000 they received from the MCA loan for revenue-generating activities and not to repay an old debt or put out a fire! IF the construction business used the $100,000 they received from the MCA loan for those types of things and they need to generate $140,000 of margin to repay the whole loan, then they would need $700,000 of revenue to produce $140,000 of margin ($140,000 / 20% margin).

See how quickly this can go bad?  

The Effect of MCA Loans

The loan itself is fast and easy. (SIDE NOTE: In life, how many things that are fast and easy are actually good for you? 😊) 

We discussed some of the problems, but practically what happens next is the worst part. The main reason for getting the loan in the first place (the “fire” or “issue” that needed to be solved) has now come and gone, but this loan and the daily or weekly repayment are here to stay. Slowly every week, the free cash flow of the business is sucked away, and as soon as one month but no more than 2-3 in the construction business, the same “fire” or “issue” arises again, but this time it is at least 2-3x worse. This time it is coupled with suppliers and vendors that have not been paid, or are so late to be paid, that they are causing stress to the business. The reasonable solutions for the company are limited, and the fact that there is an MCA payment every week is an issue for any other lenders. So, the MCA Lender comes to the rescue with another MCA loan solving the immediate pain, but in reality, it only pushes the problem down the road another 1-2 months. 

How Customers Get Burned

First, it is vital to know the business owner is rarely talking to the direct lender. The network of folks selling MCA loans are brokers who are paid a commission. There is nothing wrong with a broker trying to find the right lender for a business owner and earning a commission for doing so as long as they represent all the options to the business owner and are upfront about who they are and what they are going to do.  

Too often, brokers pretend to be the direct lender; instead, they shop your application around to the actual lenders to get the best possible rate for an MCA loan. Each of these lenders may pull the credit of the business and the business owner, which results in the credit being pulled dozens of times, and those credit pulls will cost the borrower 50 to 100 or more points off their personal credit score. 

Don’t let your personal credit and business get flushed down the drain in exchange for a quick “fix.” Let our team light the way out of your financial pit by helping you find the right solution, whether through our program or just some good advice — (813) 712-3073

Click here to read part 3 of 4 of our Dangers of Merchant Cash Advances series.

Merchant cash advances, or MCAs, are loans that business owners usually look to in a crisis. Think of them as the equivalent to the business version of a paycheck advance loan with high interest and repayment terms that often do not align with what is best for the business. MCA’s are dangerous for most merchants but horrible for construction businesses, and we’ll explain why in this four-part blog series.

In the third part of our series, we will illustrate the who’s behind the what. Be on the lookout for loan sharks dressed in brokers’ clothes. As we touched on briefly in Part 2, we will learn more about the broker world and their role in MCA loans.

Who Are Merchant Cash Advance Lenders?

A quick online search will show hundreds, if not thousands, of different websites advertising MCA loans. There are only about a dozen, or fewer, actual lenders. Merchant Cash Advance lenders selling these loans are typically brokers or independent agents with affiliations or relationships with these merchant cash advance lenders. Not all brokers are bad. We work with many brokers or referral sources that may work with clients to find the right solution. 

However, a lot of brokers are just selling merchant cash advance loans. These brokers are people that businesses need to be cautious of because a merchant cash advance loan isn’t for everyone. Like our company, Mobilization Funding is not for everyone. We educate ourselves on different lending programs and options like merchant cash advance loans, factoring companies, and purchase order financing because we want to ensure we send people to the right source. We want what’s best for borrowers, even if we’re not a fit for them. 

About Broker Networks

The broker network is directly responsible for the ultimate cost of the loan or, at a minimum, can significantly influence it. For example, the actual MCA lender will give the broker the actual cost of the loan and then provide them the ability to increase it within a range to increase their commission. The broker then has the option, or the ability, to markup that loan cost to the borrower. That markup can range from 2% to as much as 10% or more. This additional markup is how brokers make money on the loan transaction. The MCA lenders have set it up so the broker can make a lot of commission, and that commission drives behavior.

Some brokers might present themselves as the actual lender with their logo on application forms or how they introduce their product. Still, most MCA brokers are not the actual lender. In these cases, borrowers are just talking to a loan sales representative looking for a commission—not the source of the capital.

The Cost of the Markup

If a typical $100,000 loan has a 20% factor rate from the actual lender, and the broker marks up that loan an additional 10-15%, the loan cost is now 30-35%. That means the broker will make 10 or 15% of that $100,000 merchant cash advance. 

This type of loan is not ideal for construction because the MCA lenders don’t understand the nature of the construction business. If they did, they would not make MCA loans to construction companies. Worse, if they do understand the construction business and don’t care, then that means they don’t care at all about the business or even try to do what is best for them. They are simply trying to do what is best for them at the expense of the construction business.  

These brokers don’t lend based on the profit of a business but the total revenue. Construction companies must pay overhead like material suppliers, equipment vendors, and employees from that revenue.

There are less expensive and less painful options for getting ahead of your financial hump. Give us a call to map out your road to recovery — (813) 712-3073

Click here to read part 4 of 4 of our Dangers of Merchant Cash Advances series.

Merchant cash advances, or MCAs, are loans that business owners usually look to in a crisis. Think of them as the equivalent to the business version of a paycheck advance loan with high interest and repayment terms that often do not align with what is best for the business. MCA’s are dangerous for most merchants but horrible for construction businesses, and we’ll explain why in this four-part blog series.

In the final part of our series, we tell the sad but true tale of a contractor who saw first-hand a merchant cash advance gone wrong. We recount this story (one of many) just to illustrate what happens when you only take the easy and fast way out!

Easy Money

A contractor in Texas—65 to 70 years old and shortly away from his retirement—had 40-plus years in business, been in the same town, worked with the same general contractors and project manager, and developed a great company. His business grew from $3 million to $10 million, and he went from several dozen employees to over 100. 

This contractor did projects that were a few $100,000, up to a couple of million dollars. Then, one week, one of those projects had a little bit of a delay, nothing problematic, nothing different than folks see in a typical construction world. And it was going to be tight for payroll. So, what did he do? This business owner got a merchant cash advance.

He was offered a couple of hundred thousand dollars within a day was deposited into his account shortly after that. He had multiple hundreds of thousands of dollars going through his account, and he’d been in business for years and had a great relationship with his bank. It was easy to lend him money. He said, “Oh, my payroll is only $60,000 or $70,000 per period, but it is always good to have a little extra money.”

MCAs: Too Good to Be True

So, the contractor took the loan, and he started to repay that every day. The first and second months weren’t an issue, but suddenly, the amount of cash flow debited from his account over those two months strained his cash because contractors only get paid once a month. 

Typically, contractors are paid that month for what they did and the costs they incurred 45 or 60 days ago. These payments are not in line with their current payroll or overhead. So, contractors are left floating payroll and expenses to material suppliers for six to eight weeks. These contractors must also have money left over to repay their MCA loan.

If businesses earn money out of sequence with an MCA’s repayment structure, they will have cash flow problems. This kink in cash flow will cause the business owner more stress than just missing payroll one week or having a challenging conversation with a material supplier, vendor, or employee. 

This solution may sound like the worst-case scenario, but it’s not as bad as what happens two and a half months after getting an MCA loan.

Robbing Peter to Pay Paul, Except Peter Is Broke, Too

The contractor had the same payroll problems but now had two months’ worth of accounts payable issues too. He didn’t pay materials suppliers, and the vendors shut him off on the jobs. The suppliers were not going to be without payment, and they weren’t going to deliver. 

Because the suppliers and vendors ultimately put liens on the project, the contractor had general contractors and their project managers calling him, wondering about the suppliers’ payments. The project managers also held back paying any money they owed the contractor for previous months’ invoices because of the liens placed on the project.

To add insult to injury, the merchant cash advances lenders are calling this contractor too, but this time, they’re not calling him and offering more money. They’re calling him because their daily debits are starting to bounce, and they’re getting frustrated and making threats. In addition, they are also calling the Project Managers and telling them to freeze payment because they are entitled to the money owed to the contractor. 

Now, this contractor is in a world of hurt, and instead of just missing payroll, his whole business is now at risk. This financial crisis could have been mitigated if he had been educated on the dangers of MCA loans. 

The Fast and Easy Path Is Usually the Wrong Way

The MCA lenders led the contractor down a path without giving them all the information—but it is up to businesses to stay informed.

Merchant Cash Advance loans are not smart solutions for construction companies. If a business is working with people who have the borrower’s best interests at heart, they will ask tough questions.

Then after careful deliberation, they will use this information to help assess the business so they can appropriately give it something beneficial to the company’s future. If receiving $100,000 feels too easy, be cautious. There are always strings attached. These strings just happen to appear a few days, weeks, or even months later.

At Mobilization Funding, we’re here to help you make better construction business decisions. Let’s chat about your options — (813) 712-3073