In the last five years, it has gotten extremely difficult for a business owner to access funds through a loan system by a financial institution. In fact, approximately 80% of all small business that apply for loans from a big bank get rejected. In order to deal with this shortfall, the Merchant Cash Advance (MCA) was developed in order to help small business owners and independent businesses access capital. The key characteristics of a merchant cash advance include a limited amount of paperwork and quick access to funds, both of which see it as a much better source of funding than a loan. Loans from financial institutions routinely take weeks to complete processing, and the release of funds could be anywhere from 2- 8 months. The reality is, small business owners don't have the luxury of waiting months to obtain financing, and the chances of obtaining a bank loan is slim to none as it is.
In a nutshell, a merchant cash advance (MCA) can provide business borrowers with an upfront fixed amount of cash in as little as 24 hours. The funding amount is based upon a percentage of the businesses credit card receivables or daily cash balances using historical credit card receipts and bank statements to determine the initial advance. The business pays back the advance, plus a percentage, often referred to as a discount factor, from a portion of their credit card receivables or cash available plus a percentage which is often referred to as a discount factor. The remittances are drawn from the business customer on a daily, weekly or monthly basis until the obligation has been met. An MCA is not technically a small business loan and as such MCA's are not limited in what rates they charge or what terms they establish and therefore often have high interest rates. For this reason it is very important for a business owner to be completely aware of how the MCA product works and how it could affect their business. MCA's are good options for small business owners who may not have strong credit but have lots of credit card activity, or strong cash deposits and need financing quickly.
The MCA business has grown tremendously since 2007, when the recession led banks to cease lending to small businesses almost completely. As with many business phenomenons, the potential of this unregulated profit source encouraged countless irresponsible and unethical providers to advance as much capital as possible, regardless of borrowers’ demonstrated ability to repay. These deceitful lenders held business owners to exorbitant interest rates and used contracts riddled with vague clauses and hidden fees. From telemarketers blowing up your phones, loan brokers harassing you, non-stop social media posts, postcards arriving in the mail, flyers landing on your desk, banner ads flooding your search engines, pop ups appearing on every website you visit and emails flooding your inbox. All promising the lowest rates, best terms and instant pre-approvals for hundreds of thousands of dollars simply for having a pulse. These days, you can't get away from all the small business loan offers if you tried.
Years ago, it was near impossible for a small business owner to access capital. Today, it's literally being forced down their throat. Small business owners have caught on; some are playing the system and some have fallen prey to this model. On the flip side, many small business owners must be held accountable, as they have willingly accepted more loans and MCA's then they can handle. Another problem arose out of this, and it's called stacking. If you’re unfamiliar with the term, loan stacking is where a loan or cash advance is approved on top of a loan or advance that is already in place with similar characteristics and payback terms. While many business owners may have not heard of the term, there are a number of negative small business loan stories that can be attributed to stacking.
Here’s how it happens. You accept a small business loan or merchant cash advance from a reputable funding company such as LVRG. Let's say for example, LVRG is able to secure $100,000 in small business funding. A UCC filing is made typically with the office of the secretary of state where your business is located. This may happen with a loan where there is a security interest, whether it’s from the bank or any other lender. The filing basically provides notice to the world that your business has existing debt.
A second lender, who you don’t know and likely have never spoken with before, buys your name off a list, and/or sees the filing (because it’s part of the public record), then calls to say, “I see you just got a loan or merchant cash advance, but we can get you more money at a great rate. Could you use a little more? We could offer you an additional $25,000 right now.”
If a business owner says “yes” to these offers, sometimes multiple times, it could create a situation for the small business owner where he or she will struggle to repay the loans. This is not only a major problem for the small business owner, but it also increases risk for the first lender. We have seen as many as 11 MCA’s stacked up on top of each other. Look at it like this, if your margins are 20% and you are paying 200% in multiple MCA’s, how long do you think you’ll be in business? A house of cards has been built, not only for the business owner, but for all the lenders in the line-up.
Unfortunately, there are lenders out there whose entire business model is based upon detecting recent loans made by a first, credible, lender, and then attempting to stack one of their loans or merchant cash advances on top of the original loan. Frequently, these lenders are familiar with the underwriting model and approval process of the first lender and thereby can guess at the creditworthiness of the borrower. Basically these predators are capitalizing off of the diligence of the first lender—and significantly increasing the risk to the small business and the original lender by adding additional debt. They do this because there will be a percentage of business owners who are actually able to service the debt, but there are many who can’t. Often times, small business owners are nearly forced to continue to accept more MCA’s, just to pay for the one underneath it. Hence, creating a ponzi scheme upon themselves. To the lenders defense, countless small business owners are also playing the system and putting lenders in severe strain due to an obscene amount of un-collateralized defaults. Some lenders, have closed up as well...
Many reputable lenders are opposed to these practices and have an anti-stacking policy, but that doesn’t seem to phase many other lenders, or small business owners alike. A responsible lender ensures that a loan is appropriately sized according to a business’s performance and ability to repay, and that the loan is an appropriate fit for the intended use. It is important to note that stacking is different from using the proceeds of a second loan to pay off the balance of a first loan in order to acquire additional funds. In this case the second lender can evaluate whether or not to approve the additional debt, and the balance on the first loan is completely repaid. This is a responsible way for the borrower to acquire additional funds if needed. It enables a legitimate approval process to take place before a second loan is approved, and prevents a borrower from taking on an unsustainable debt-burden. Loan stacking is a bad practice used by unscrupulous lenders and puts businesses at risk of default and bankruptcy.
If used correctly and at the right time, a merchant cash advance can work wonders for your business. If used for the wrong reasons or at the wrong time, an MCA can crush your cash flow and even put you out of business. The problem is, most people "selling" merchant cash advances and other small business cash flow loan products, know absolutely nothing about small business, and/ or finance. They are selling you these products strictly for a commission, and most can care less what it does to you, or your business. And since these types of small business funding products are given without any collateral, many folks are preying on lenders just as heavy as some lenders are preying on them.
A decade ago there were only about ten Merchant Cash Companies in existence. Today there are thousands. There is wide variation between the pricing and terms across MCA providers so it is very important to know what lenders are out there, and the fees attached. Furthermore, not all Merchant Cash Advance lenders are created equal and many are only interested in increasing their bottom line, not yours. So, it's imperative you choose wisely. LVRG is a team of the right people working with the right data getting you the right-sized funding for your business. At LVRG, we believe we are different from other lending firms. We never set out to be the biggest, but we do strive to be the best. Our deep sense of integrity, professionalism, and commitment to the spirit of entrepreneurialism propel our determination to provide assistance to small business owners in a challenging economic climate.