We’re all pretty familiar with MCAs and how they can lead to a cycle of high-interest debt where the only way to repay your loan is to take out a new one. But what you may not know is that MCAs are really good at hiding in plain sight. They lean on deceptive terminology to throw subs off their scent, so subs won’t realize they’re looking at a lender that can send their business into a financial spiral. In this article, we’ll guide you through the terms MCAs hide behind, so that you know what to avoid.
Table of Contents
But First, Some Quick Refreshers:
What is an MCA?
A merchant cash advance (MCA) is an alternative type of business financing that outwardly looks like a business loan, but has key differences. An MCA company buys a portion of your future receivables by giving you an upfront sum of cash. You repay them using a percentage of your debit and credit card sales, plus a fee.
MCAs are meant to provide cash flow immediately, but are very expensive, and as we’ll explore, often harmful.
Why Should You Avoid MCAs?
We’ve written a lot in the past on why MCAs are predatory, but here’s a quick refresher:
- “Interest rates” up to over 100% and considerable financing charges, with minimal transparency about those terms before you sign
- There’s no benefit to paying your debt off early; the “interest rate” on MCAs is flat and consistent, so whether you pay the money back in 2 days or 30 days, you’re still stuck with the same, massive rate
- Could harm your relationship with the GC, because the MCA company will call and hound them if you are late on the high payments they’re seeking
- Can hurt your personal credit, with consequences extending beyond your business and into your personal finances
- Locks you into a cycle of debt that’s extremely hard to get out of, in which the only way to pay your first MCA is to take out a new one with equally poor terms
- If you’re looking to get other forms of capital, reputable lenders and bankers may be less likely to work with you; if you owe too much to an MCA, it may prohibit you from receiving new sources of capital at all
- Careless disregard for your team and company
Terms Predatory Lenders Use to Avoid Saying “MCA”
MCAs obviously won’t lead with the truth or just out themselves as high-risk for your business. Why would they? That means they’re using new deceptive language to draw you in – a wolf in sheep’s clothing.
The Short List of Terms You’ll See Some Disreputable Lenders Using:
- Alternative funding
- Direct funding
- “An investment” or ”We invest in companies”
- Line of credit
- Bridge capital
- Growth capital
- Acquisition financing
- Vendor payable extension
- Undervalued equity
- Funding in 24 hours
- Pledging future receivables
Let’s Unpack Why These Terms Are Misleading and Predatory
Why Are “Alternative” and “Funding” Sometimes Red Flags?
You’ll notice that they strategically avoid the words “loan” and “lending,” because these words would make them subject to the same government regulations that banks are. They can operate without as much oversight by not using these terms. This is why they prefer the less regulated term “funding.” They tack on the word “alternative” because of how they differ from traditional banks. Not all bank alternatives are awful, but if you see these terms, it’s a tip off.
How Are They Misusing the Term “Investment?”
You’ll hear the word “investment” thrown around by MCAs and the brokers who connect you with them. Shameless brokers and MCA companies will present themselves as “investors” with a portfolio of companies they’ve “invested in,” but they’ve co-opted the word. The only dividends this investment pays are the massive fees they use to bankrupt you. The best way to spot a bad broker is to research the companies they’re suggesting, and use the criteria that we’ll go over later in this article.
Is It Really “Funded Within 24 Hours?”
It can be funded in 24 hours, sure. Non-predatory lenders like Billd can actually offer equally speedy funding, but with greater inherent quality control (i.e. we won’t lend you money you can’t pay back, or lock you into a vicious debt cycle). Careless, predatory funding on the other hand, is fast because it isn’t subject to the kind of delays that come with due diligence or strict underwriting. It’s not that this promise is misleading. MCA absolutely can give you ultra fast funds, but at what cost?
Why Is It Different from a Line of Credit?
‘Line of credit’ is a familiar term that predatory lenders use to put subs at ease and hide what they really are. Lines of credit have a better reputation, and they leverage that. However, it has key differences with a traditional bank line of credit. It’s like they took a line of credit and changed the terms to make it as damaging to you and profitable to them as possible.
With an MCA “line of credit”:
- You can’t make low, interest-only payments when you need to
- You are paying principal and interest at much higher rates
- The interest rate is nothing near what a reputable bank would charge you
- The MCA is set-up as a short term draw that typically has to be paid in full in 3-4 months
A Set of Criteria for Identifying High-Risk Lenders
Use this criteria as you evaluate lenders and try to determine if they’re secretly predatory:
- Are They Marketing Only to Brokers? Many MCA companies skip trying to market to you, as a business owner, at all. They market straight to the brokers whose job it is to bring them businesses they can prey on. If a lender’s website is talking directly to brokers, that’s a red flag. Look for terms like ISOs, syndication, white label programs, or verbiage about taking “even your worst deals” or “funding your bad credits.”
- Is There No Team Page or Info About Who Works There? Some MCA company leaders don’t want anyone to know that they or their employees work there, partially because they’re involved in something so unethical. Not seeing an ‘Our Team’ page may be a subtle red flag. By contrast, a strong online team presence can be a green flag. It means they have nothing to hide, and no one is concerned about the reputation of working there.
- Are the “Good” Reviewers Only in the Honeymoon Phase? Check online reviews, but proceed with caution. Some MCAs will have scathing reviews from companies they’ve hurt, but some of them will have good reviews that were written almost immediately after a customer got funded. They’ll be riding a high when they write the review, but it’s a different story a few months later and they’re nearly bankrupted by that MCA.
- Do You See Their Name in Lots of Court Cases in the Public Domain? When a sub can’t pay outrageous fees, the lender gets hit with liens and judgments. This ends up in the public domain. If you google the name of an MCA with the words “suing” or “court case,” and you see results about former customers they’re suing, consider that a red flag. A highly litigious lender (in other words: court-case-happy) is often an unreputable lender.
- Do You See Ads from Companies that ‘Can Help’ If You Used This Lender? When you Google a lender and see results like “Owe money to X Lender? We can help!” or “Getting sued by X Lender? We can help!”, that means entire companies exist to help people get out from under that lender’s terms.
- Do They Have Prepayment Penalties or Required Interest Payments? When reviewing a contract with a lender you suspect could put your business at risk, check for prepayment penalties, or requirements that say you have to pay all fees and interest for the life of the loan, even if you pay it off early.
- Do They Have a Sky High Daily or Weekly Payment Structure? You’ve heard the saying, “the proof is in the pudding.” Well, in this case, the proof is in the payment terms. The payment terms of a lender are the only place they can’t hide their harmful nature. They rarely get into the actual cost to you until it’s time to close. Then they’re required to disclose daily or weekly payments, so take a good, long look at the payment structure they’re offering (Are you paying tens or hundreds of thousands of dollars a month? Is the total interest basically the same size as the loan?) and it will tell you whether they’re predatory. Also check for language on their website like “affordable daily or weekly payments” instead of “monthly term loan payments.” They say this because $10k a week sounds better than $40k a month (for example). But these are weekly debts that will drain your bank accounts.
- Are They Carelessly Giving You More Money Than You Can Possibly Pay Back? Make sure they are not offering more than you can actually pay back in the long run. The wrong lender won’t look out for you by not advancing more than you can pay.
- Do They Not Take Assets as Collateral? As you already know, with banks you typically have to put assets behind your loan or line of credit, but in exchange, you get a much lower interest rate. MCAs don’t ask you to put assets up as collateral, but that doesn’t mean your assets are protected. They could still go after your assets if they sue you.
- Is the Broker Offering a Product with Suspiciously High Fees? Spotting a harmful lender often starts with vetting both the broker and the product they’re offering. If the initial offer has high daily/weekly payments, high fees, and a promise to refinance with a better product in the future (very unlikely), then you’re probably looking at a broker who’s just trying to earn extra commission.
What Is Billd’s Stance on MCAs?
We take a critical stance on MCAs, not on the subs who use them. Billd understands that sometimes tough times can push subs toward less-than-stellar financial options like MCAs. We speak out against them because those massive MCAs payments can deplete your profits – to the point that paying your workforce or even personal expenses gets hard. Predatory lenders often target companies that are in a pinch, and they keep the barriers to entry very low. All these factors make it easier for them to trap honest subs, and not just young or lower revenue businesses. Billd sees subs with tens of millions of dollars in revenue getting involved with MCAs. No one is immune.
What to Do If You Have Bad Credit or Are in a Vulnerable Financial Situation
It’s easy to tell you to not go toward MCA companies, but it’s important to tell you what to do instead.
- First of all, if you’re tempted to work with an MCA, ask yourself: What will these bad payment terms look like over the course of a year? You’ll find the payments will severely limit, or outright stop, your ability to run your business. If that’s the true cost, how is it worth it? We see subs take MCAs out for short term needs, but then they’re on the hook for it for an entire year or longer.
- If you have a bank relationship, talk with your bank. Look at traditional lines of credit and financing companies with reasonable repayment terms and rates like Billd.
- The best thing you can do is build operational and financial efficiency, to avoid feeling like you need an MCA in the first place. That takes a lot of preemptive strikes, like refining your bidding process and picking the right jobs. Taking financing into account in the preconstruction phase can help you avoid cash flow challenges down the line.
- Make a habit of calculating the true cost of the capital you use (i.e. interest, financing charges) and adding that cost to your bids. This small increase is a protective measure that will ensure this cost doesn’t slowly and silently erode your margin.
- Take a stand against slow pay. Be more proactive with your GCs on collecting their outstanding payments. To help that initiative, create a regimented process for how you’ll respond to unpaid AR as a receivable ages (i.e. at 30 days, we do X, at 60 days, we escalate with Y).
At Billd, our mission is to advocate for subcontractors. That not only means providing transparent, industry-tailored financial solutions, it also means steering you away from the options we know will hurt your company in the long run.
