A recent report indicates the global merchant cash advance (MCA) market will grow at a compound annual growth rate (CAGR) of approximately 6 percent from 2022 to 2032. This report highlights the strength of the MCA market but skirts around the risks of merchant cash advances and the consequences of defaulting on an MCA agreement.
What Is A Merchant Cash Advance?
A merchant cash advance is a type of funding commonly used by entrepreneurs, startups, and small businesses looking for an alternative to bank loans and lines of credit. Traditional loans have strict lending criteria, including good credit, cash on hand, a minimum of 2 years of business history, and require the borrower to provide collateral.
By contrast, an MCA is the purchase and sale of future receivables (credit card sales) in exchange for lump sum cash upfront. The cash can be used as working capital to purchase inventory, hire staff, meet payroll, and pay unexpected business expenses. The credit criteria for an MCA are far less stringent than a bank loan – approval is based on an analysis of prior sales. The advance is paid back by daily withdrawals from the business’s checking account, based on an agreed-upon percentage.
The main benefits of an MCA include:
- Significant lowering of collateral requirements
- Flexible repayment terms
- No mandatory deposits
There are risks, however, including the potential for default if the business experiences a downturn. We’ll get to that in the minute.
The Outlook Is Solid For Merchant Cash Advance Providers
The MCA market report shows that the industry is strong, the wealth involved, fields about to grow, and the risks associated with marketing in this industry. Key players profiled in the report include:
- Fundbox
- Finical Holdings
- Square Inc.
- National Funding
- CAN Capital
- Credibly
- Merchant Source Inc.
- Fora Financial
Small businesses that lack access to traditional credit sources have been turning to these funders since the 2008 financial crisis; this trend has accelerated during the Covid-19 pandemic.
Covid-19 Impact on Small Businesses
The Covid-19 pandemic and the resulting restrictions caused cash flow problems for small businesses around the country and the world. While many tapped the federal government’s PPP loan program, others looked to the merchant cash advance market for funding. Some that have taken MCAs may be struggling to repay the advance, putting their assets at risk.
A typical MCA agreement includes a confession of judgment in which the business acknowledges liability for the advance and waives any defenses. Funders also require owners to sign personal guarantees and pledge their assets. If the business defaults, the funder can seize the assets and force the business to close.
How To Reconcile A Merchant Cash Advance
A merchant cash advance is not considered a loan for two reasons. First, an MCA is the purchase and sale of future receivables, akin to invoice factoring. Second, an MCA agreement includes a reconciliation clause, requiring the funder to restructure the repayment terms if the business experiences a downturn. That means the MCA agreement is not a demand for payment and, therefore, not a loan.
The business must notify the funder of a receivables shortfall and demonstrate that it can return to profitability to reconcile the advance. That’s where an experienced merchant cash advance attorney at ReconcileMyMCA.com can help. If you are facing default, our debt relief specialists will help you gather the necessary financial information and negotiate new payment terms with your MCA provider. Contact our office today by completing the convenient intake form to get started.