Merchant cash advancing has never really been in the limelight, possibly because it’s completely unsecured or else because it’s just so expensive. However, when a slumping company needs cash fast, sometimes MCAs may look like the best options.

One company that performs this type of funding is appropriately called They are boasting rapid growth and increasing popularity this year among small businesses as a result of the difficulty and length of time it takes to get approved to receive a secured loan from a traditional bank.

How it works

A merchant cash advance (MCA) — also known as credit and receivables financing —  is similar to a payday loan for small businesses. After filling out a quickie application form and submitting some financial information, the most important of which are your credit card receipts for the past six months, the business owner receives an advanced cash sum, wired to the merchant’s bank account.

Companies can receive up to $500,000 without the amount of paperwork required by banks. There is no collateral necessary and no credit check required. The only requirements for receiving an MCA are a minimum of $5000 a month in credit card processing during the previous six months. The amount received depends on credit card processing volume.

The merchant agrees to pay back the principal plus a fee, which is 25 percent of the total amount advanced and up. The MCA provider collects a portion of the business’s credit card sales until the debt is paid.

An alternative credit score

This service has been in existence for over a decade, but has only recently exploded with over 50 companies offering MCAs due to the desperate need for capital and the fact that banks are not facilitating this process. This is an easy way for companies with strong credit card sales but bad credit history to find funds. A sensitive payment plan does away with hard deadlines and allows merchants to repay less when sales are slow.

However, as is always the case convenience does not come cheap. Since most business owners repay their debt within six months, a 25 percent fee is equivalent to taking out a loan with an annual interest rate of 50 percent or more. This is not interest though, because it is not a secured business loan.

A few years ago there was a bit of commentary surrounding the MCA, but journalists have remained pretty silent since then. As our economy reels out of control businesses need financing, but without good credit banks won’t approve, leaving most businesses to fend for themselves in an insecure world.

This is where the importance of an alternative credit score comes in. With this system consumers can have a new way to show banks they will be a reliable borrower. While banks have yet to embrace this type of system, companies like Yodlee, the leading provider of online personal financial management, see a lot of potential in it. Credit bureaus utilize many factors to determine your credit score, but Yodlee can see your purchases, payments, and almost anything you’ve done with your finances.

With this type of financial aggregation, banks and lenders can determine whether you are a good credit risk or not forcing high cost MCAs to be a thing of the past. An MCA is not a preferable solution for any business, so banks must combat them and extend secured loans to merchants who so desperately need them. The credit score system must be updated to incorporate all elements of a potential borrower’s financial history in order to build up our economy and create new jobs — and get rid of unsustainable lending practices.

Did you enjoy this article? Yes No
Oops! What was wrong? Please let us know.

Ask a Question