MCA Myths, Debunked. Part 1: "Why would I get an MCA when I can get a bank loan?"
Updated: Oct 1
The Merchant Cash Advance (MCA) industry is relatively young, and due to a few bad players—MCA companies that aren't transparent about their terms and engage in deceptive practices—there is a lot of misinformation floating around about the MCA space as a whole.
With this monthly article series, MCA Myths, Debunked, we aim to bring answers and clarity to the ambiguity and misinformation around MCAs.
In this article, you'll read information and advice from three MCA industry leaders who have a combined 30+ years of experience in the sector.
Pictured left to right:
Heather Francis, Founder & CEO, Elevate Funding
Ken Peng, Director of Business Development & Marketing, Elevate Funding
Reynold Jackson, Senior Underwriting Manager, Elevate Funding
What are the fundamental differences between a Merchant Cash Advance (MCA) and a traditional bank loan?
KP: A Merchant Cash Advance is merely providing immediate access to a percentage of projected future sales from an existing business. A bank loan is not based on a business’s projected sales, and is providing capital to a merchant based on their credit history.
RJ: [For MCAs,] the daily or weekly debit is flexible, as MCAs are only taking a percentage of the merchant’s overall sales. A loan has an interest rate, and the amount paid is dependent on how quickly it is paid in full. The monthly payment is generally fixed for the entirety of the loan.
What are some of the key benefits of an MCA over a traditional bank loan?
HF: MCAs can move faster than traditional bank funding – sometimes even the same day you apply. MCAs require no collateral or personal guarantees, and MCAs are more lenient with negative data on a credit report.
KP: Immediate access with less hoops to jump through is a major benefit. Many times, we come across scenarios where a business is in urgent need of working capital that is vital to continuing their cash flow. For example, a trucker who only has one vehicle that is in need of repairs, or a restaurant [owner] whose walk-in freezer is broken and is in need of repairs. If there is not sufficient cash reserve, these scenarios would prevent the business from operating without immediate access to capital. The ability to access these funds quickly can make or break many of the businesses out there. The same can be said for business owners who may have experienced financial hardship in the past, causing them to be disqualified from loan options now in spite of doing good business. We don’t believe this should be held against them.
RJ: MCAs fund quicker—usually within 24 hours of initial submission—while a traditional loan may take weeks, if not months, before funds are disbursed. MCAs are more forgiving of past indiscretions – no credit, bad credit, bankruptcies, liens, judgments, foreclosure, criminal charges.
What are some common reasons a company would pursue an MCA over a bank loan?
KP: Expansion or rapid scaling; we’ve talked to merchants who used their advances to bring on new employees to handle an increase in volume, or to buy pieces of equipment to help them take on big jobs. Plus repairs to equipment (like I mentioned before) – things that are costly to fix and are vital to their operations.
RJ: They may have no or low business credit. They may need funds quickly to continue business. They may prefer the shorter term of repayment. They may prefer the flexibility.
How long does it usually take for a company to be approved for an MCA? How long for a loan?
KP: Elevate provides approvals within a couple hours and we’ve been able to get the working capital wired into the merchant’s bank account on the same day. It all depends on how quickly documents and signatures come back to us. Bank loans can vary, and I’ve personally seen them take weeks or months to complete.
What are the fees and costs of an MCA vs. a loan?
KP: While I can’t speak for other funders in the MCA space, Elevate does not charge a fee beyond a flat $200 or $350 ACH setup fee. Our product is niche and accessible by merchants who may have a history of financial hardship, and who may have been turned down by traditional bank loan providers, so our factor rates are going to be higher. But our merchants do not incur any origination costs, closing costs, or underwriting costs as with many loan options or even other MCAs.
RJ: MCAs have a factor rate used to determine how much a merchant will pay while a loan product has an interest rate.
Why do you think some companies are more likely to choose a loan over an MCA?
RJ: I believe the negative perception of MCAs is the reason for people choosing loan products over MCAs. Every industry has unsavory players, but to only focus on the unsavory players is not fair to the players doing things the right [way]. People generally trust banks, but there are unsavory banks as well. Loans have been around longer than MCAs, so people naturally feel more comfortable with the item that has been around the longest.
As a leader in this industry, what do you wish more people realized about MCAs and their value to businesses?
HF: If you qualify for a bank loan, you should try to seek out those options, but keep in mind any potential restraints such as time, collateral, or credit issues. If any of these are restraints for you personally, you should keep MCAs as an option, too.
KP: As with anything, there are good players and bad players. We encourage business owners who are in need of working capital to do their research and really understand who they are working with before taking on a cash advance. When used correctly, it can be a very powerful tool in the growth of a business. You don’t want to miss out on a potential big job opportunity because you lack the equipment or manpower. You don’t want to miss out on a great marketing opportunity because you just don’t have the money in your budget to do so. And you do not want to put off repairs or maintenance items that are vital to your business success. You should have options and the ability to address all of these items in a timely manner. A Merchant Cash Advance can help in these scenarios when you’re working with the right people and using the funds for their intended purposes.
RJ: It is invaluable to have quick access to funds. Hardships in life and business are almost guaranteed. So would I rather have a product that has flexibility in repayment and can fluctuate as my situation fluctuates, or would I rather pay the same amount every month regardless of the ebbs and flows and seasonality of my business? MCAs are not meant to replace loans; [they are] filling the void associated with traditional loan products. I feel loan products are best for starting your business, but in maintaining your business, MCAs allow for more versatility and flexibility than a traditional loan.
At Elevate Funding, honesty and transparency are at the core of what we do. We genuinely believe that MCA is the best funding option for business owners who find themselves in a variety of circumstances – whether they are in a slump, need quick funds to rectify an unexpected emergency, or if they're looking to expand and increase their market share.
Our goal? To continue to advocate for our merchants and fund the companies that make America's small business landscape so interesting, valuable, and diverse.