MCA Myths, Debunked. Part 2: "MCAs are predatory loans."
Updated: Nov 4, 2020
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
The myth we’re exploring today is that MCAs are inherently predatory. How do you think this myth got its start?
HF: There are news pieces that focus on misinformation and half-truths about the product. They use loan terms to describe MCAs, which is not an apples to apples comparison. It’s really apples to oranges. Also, there's a misconception that if a bank is not providing the financing then it is predatory. This comes from the illusion that federal and state regulation is carried out in the interest of providing consumer protection.
Last, there are some bad players in the industry. We are always compared to and stacked against bad experiences. This is true across all industries – one bad experience can draw a bad reputation.
KP: There is a lot of conflation between a traditional loan and an MCA. The Bloomberg article certainly did not help, spreading a lot of misinformation and using a lot of terms that don't apply to MCAs. Given the easy barrier of entry into the industry, many ISOs, and even funders, do not use the correct verbiage or accurately explain how an MCA truly works.
UCCs and COJs – can you dive into exactly what these terms mean?
KP: UCCs are essentially a lien filed by a lender when they make a collateralized loan, essentially declaring an interest in property for a debt. This is something that a lot of funders in the MCA world file upfront on all transactions. Elevate does not do so unless the file enters into collections status after exhausting all possible avenues to rectify the situation.
COJ stands for confession of judgement. Essentially, it is an admission of liability and failure to abide by contractual terms that allow for the filer to bypass the legal process to satisfy a debt. Unfortunately, some of the bad players in our space use this as a technique to forcefully secure their receivables from merchants at the first sign of trouble. In fact, some of them base their entire business model on making outrageous offers that overextend merchants with the intent of exercising their COJ power. Luckily, this process has been brought to light and states are starting to ban it. Elevate has not and will never make use of COJs.
Stacking also seems to be a common reason for the whole predatory misconception. Can you briefly explain stacking and your stance on this practice?
HF: Stacking is an industry-specific term describing the practice of taking on multiple advances or loans in the same time period, which overleverages the business. Elevate does not condone stacking. When a financial institution reviews a business for funding, they take into account the current cash flow restrictions and provide an offer based on what they feel the business can afford. Stacking puts the business at risk for negative cash flow and can cause harm that the business can’t recover from. This bad practice is seen throughout many financial sectors, like credit card debt and student loan debt.
RJ: Ultimately, stacking happens when a merchant overleverages their liabilities in relation to their assets. It is unfortunate that lenders take the brunt of the blame when a merchant decides to take multiple advances without truly calculating if they can handle the payments, but that is how the vendor/consumer relationship works. For example, in engineering, everything is built with a “factor of safety.” If you buy a chair that was built to safely handle a 200-pound person, with a factor of safety of two, the chair was engineered to withstand the weight of a 400-pound person. Engineers know the consumer often pushes the limits of what the product can handle. The onus is always on the vendor to protect the consumer, even if the consumer doesn’t use the item as it's intended. This is why we do not allow or condone stacking.
Since the MCA industry is not widely regulated, what is Elevate doing to protect its borrowers and prospective borrowers?
HF: It is a myth that the space is not regulated – we have to adhere to many regulatory bodies and their guidelines, such as the FTC and UDAAP policies. Elevate maintains and adheres to these guidelines, and we are also members of the Small Business Finance Association (SBFA), which continues to provide guidance and lay framework for all future regulatory guidelines, both state and federal.
KP: We take great precautions when taking on referral partners. All of our partners go through a screening process before they are allowed to send their prospective clients to us, and we actively monitor them for any bad practices. All of our terms are clearly laid out in plain language on our offer sheets. This includes any fees, add-on qualifications, and payment amounts. In addition, a dedicated customer service team is available to assist the merchant with any hardships, renewal requests, and to field any questions they may have throughout the duration of their advance.
RJ: We do not want our merchants to be overleveraged, so we do not allow or condone stacking. We conduct welcome calls in which we explain all the terms of the contracts that the merchant signed, including the process and costs. We take any and all steps for our merchants to explicitly understand our product. We are extremely transparent.
What advice would you give to a business owner who is considering MCA as a funding option, but is reluctant because of the stories they’ve heard about the bad players in the industry?
HF: Work with a funding company that is a part of a reputable association and is held to industry best practice guidelines. Make sure that you have researched the company and its reviews. Make sure that you understand the contract and what is required of you. If there are guidelines or requirements that you do not feel comfortable with or do not feel you can meet, it may not be a good idea.
RJ: You should always remember why you need the funds in the first place. If I were the business owner, I wouldn’t want the most money possible – I’d want the best money possible. I’d search for honest, reputable, transparent MCA providers, as those are the only ones I’d consider signing a contract with. How informative is their website? How are their reviews? Research is key!
How is Elevate helping reshape this notion that MCAs are inherently predatory?
KP: Through doing right by our merchants. We do our best to educate them every step of the way, conduct our business with transparency in mind, and actively reach out to help them along the way if they are experiencing any difficulties. Resorting to bullying tactics and overextending our merchants is not how we operate. We succeed when our merchants succeed.
RJ: Everyone at Elevate understands our products, our focus, and our mission statement. We truly believe in what we are doing and how we are doing it. Our quality products and services are why we can be transparent. We understand that our product is not what is best for everyone, so we will never push it on anyone.
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.
If you like this article, please tune in for Part 3 on Monday, November 30.
The topic? "If my business falls behind on a payment, MCA companies will seize my bank account."
At Elevate Funding, transparency and honesty are at the core of what we do. When you select us as your funding provider, you are placing a safe bet on your financial future. We want to see our merchants succeed, and we will do everything in our power to work with you on your specific needs. We know small business, and we’re here to help.
If you need funding and wish to speak to someone now, please call us at 888-382-3945 or click here to send us an inquiry. One of our teammates will get back to you as soon as they are available.