MCA Myths, Debunked. Part 4: "Only businesses with bad credit should take out MCAs."
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
Why do you think it’s a common misconception that MCAs are only a viable funding choice for businesses with bad credit? How did this myth get its start?
HF: As a society, we have the notion that good credit means access to bank products and low cost of funds, which is true still in any society and not just from a financial standpoint. Credit means that one has the ability and willingness to honor an agreement. This notion has been taught and reinforced through marketing campaigns, life experiences, educational life courses, and even in the family unit. I remember my parents and grandparents explaining to me the value of money and the importance of credit to one’s name. A funny anecdote on that – my grandfather once told me he would give me a dollar if I would perform a chore for him. At the end of that chore, when asking for the dollar, I received the response, “You will never be broke if someone owes you,” then he walked away without paying me. This happened over the course of a couple of weeks and not once did I receive payment for work performed. It reached a point where I decided I should ask for the money upfront before completing the work assigned. My grandfather in his wisdom used this to show me the importance of your word and honoring what is promised – as with each chore performed and no payment, he had lost his “credit” with me.
KP: I think the “alternative financing” term can make it seem as though it’s only an option for people who do not qualify for traditional bank loans or lines of credit. But any business that has an immediate need for working capital can benefit specifically from the speed and ease of access that an MCA can provide. There is a wide range of MCA funders who can service a variety of credit profiles.
RJ: I believe this came about because of traditional loan providers — saying MCAs are a "bad-credit funding option" did not take any prospective clients away from their products. Traditional loans require good or decent credit, so what better way to promote their product while demoting another than by putting the other product in a box that does not affect theirs? Well played, traditional loan providers. Well played.
What are some common reasons a business with good or excellent credit would take out an MCA rather than a bank loan or another financial product?
HF: We are at a point today where banks have been unable to compete in the alternative market due to their restrictions on the regulatory and technology front, which has limited their ability to adapt and change to provide more complex products with faster turnaround times. Combine this with the new way of looking at credit, the alternative sector has been able to capitalize on providing better and faster services for all credit ranges. Merchant Cash Advances are a part of that alternative sector, and with its advantages of no set repayment, no collateral, and no accruing interest, the product can be very advantageous for a business owner no matter the credit score.
KP: Any scenario that would require quick access to capital without having to jump through the hoops and hurdles it would take to secure a loan product. We’ve had examples ranging from restaurants whose walk-in freezer or oven breaks down, auto mechanics who need to purchase a piece of equipment, or construction companies who need to staff up to meet job demands.
RJ: Speed of receiving funds, past background check indiscretions, and/or MCA being a better fit for the business.
We touched on this in our original MCA Myths article, but can you quickly note the key advantages MCAs hold over other financial products?
KP: Ease of access to funds, fast turnaround times, and no limitations or restrictions on how to use the funds for a business.
RJ: MCAs fund considerably quicker than traditional loans. MCAs are more forgiving of past indiscretions when it comes to credit and background check. Repayment on MCAs tend to be more flexible — MCAs take a percentage of the merchant’s gross revenue, so as sales fluctuate, repayment fluctuates (as opposed to a fixed monthly payment regardless of sales).
What does Elevate do to help consumers understand the difference between “credit-challenged friendly” and “credit-challenged only”? How are you helping combat this notion that MCAs are only a good option for bad-credit businesses?
KP: Elevate doesn’t seek to shame its merchants based on their financial situations. We believe that there are a variety of credit profiles when it comes to business owners, many of whom do tremendous business now, but are hindered by past bumps in the road. Our goal is to help merchants succeed, and a large part of that is to review their current business health and not focus on past challenges.
RJ: At Elevate, we offer a myriad of products to best suit our merchants' needs. We have a tier structure for all our programs so our underwriters can best match our products to our merchants. Our flagship program is the traditional program. We developed the Embark program to better assist our clients that can handle a longer term, and we developed the Abound product to better assist clients in an industry (or location) that has been significantly impacted by the events that took place in 2020. We are always evolving and looking to improve our ability to provide our merchants with products that best meet their needs. Our willingness to continually expand and adjust our products is one of the ways we show our current and potential merchants that we do not have a one-size-fits-all mentality. Whether you have good or bad credit, we have product options to best fit your needs.
Is there anything else you’d like to mention on this topic? Any advice you’d give to a good-credit business that’s considering MCA as a funding option?
KP: Any time you’re considering funding options, regardless of credit profile, it’s always best to compare as many options as you can. Work with direct funders who aren’t shopping out your deals, and do your research on reputation. Be sure to ask questions like “what fees are being assessed?”, and read through your contracts. There are a plethora of options out there, so be sure to compare and find the best fit for your business.
RJ: Do your research to compare apples to apples. Find a reputable company that offers MCAs to merchants with good credit and compare that offer to a traditional loan offer. Ask questions about anything and everything, and go with the product that matches your business needs best— sometimes that will be an MCA and other times that will be 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.
If you like this article, please tune in for Part 5 on Monday, January 25.
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.