merchant cash advance

What’s the Difference Between a Merchant Cash Advance and a Loan?

Startups and small businesses in need of working capital have funding options, such as business loans and cash advances. Determining whether a loan or a merchant cash advance best suits your situation is a matter of understanding the difference between these funding products.

Business Loans

A business loan is relatively straightforward: loans are paid back with set terms and payments over a predetermined time period. The lender agrees to provide the business owner capital upfront. In return, the business owner agrees to pay back that amount plus interest over the term of the loan.  

Typical business loan terms are 3 to 10 years. Interest rates can range between could be as low as 3 percent or as high as 22 percent, depending on the lender, loan type, and the borrower’s credit rating. The borrower will pay a minimum amount of principal and interest on a monthly basis until the loan is repaid in full. Most business loans allow borrowers to make additional payments to shorter the term of the loan, but there may be a prepayment penalty for doing so. 

Types of business loans include:

  • Term loans
  • Asset-based loans
  • Business lines of credit
  • Equipment loans
  • Invoice factoring
  • Invoice financing
  • Business credit cards
  • SBA loans

To qualify for a loan, the business typically needs to have an operating history of at least two years and a strong credit history.

Merchant Cash Advances

The first thing to know is that a merchant cash advance is not a loan, but rather a purchase and sale agreement. The funder agrees to give the business capital upfront in exchange for a predetermined portion of future credit card sales. Another key difference is that a loan is a demand for payment while a cash advance is tied to future receivables. 

In addition, a typical advance includes a reconciliation clause that requires the funder to restructure the payment if the business experiences a downturn. This feature means that a merchant cash advance is not a demand for payment and, therefore, not considered a loan.

Another important difference is that loans are based on an interest rate while merchant cash advances are tied to a factor rate, typically in the range of 1.2 to 1.5. When the factor rate is converted into an annual percentage rate (APR), the figure could rise into the triple digits. Because merchant cash advances are not loans, these alternative funding products are not governed by state usury laws.

What Happens If My Business Defaults on a Merchant Cash Advance?

In the event of default, both your business and personal assets will be at risk. Merchant cash advances usually include onerous terms such as confessions of judgment and personal guarantees that allow the funder to seize your business assets and personal property if you cannot pay back the advance. Whether you are considering a merchant cash advance or you are already at risk of defaulting, talk to the experienced debt relief specialists at ReconcileMyMCA.com.

merchant cash advance

FTC Permanently Bans Merchant Cash Provider

On January 5, the Federal Trade Commission (FTC) announced that two defendants involved in an alleged small business financing scheme will be permanently banned from participating in the merchant cash advance and debt collection industries. 

The FTC filed a complaint against RAM Capital Funding LLC (RAM) and its owner alleging the defendants deceived small businesses by:

  • Requiring personal guarantees and upfront fees from customers after representing such demands would not be made
  • Providing less funding than promised
  • Using false statements to obtain financial information
  • Making unauthorized withdrawals from customers’ bank accounts

Additionally, the complaint alleged that the defendants used unfair debt collection practices, including sometimes threatening physical violence, and illegally weaponized confessions of judgment to seize customers’ personal assets.

In short, the defendants violated provisions of the Gramm-Leach-Bliley Act and the FTC Act by misrepresenting the terms of merchant cash advances. Although merchant cash advances are generally unregulated financial products, the FTC Act bars businesses from engaging in unfair and deceptive practices in both business-to-consumer and business-to-business transactions.

The Settlement Between the FTC and RAM

As part of the settlement, the defendants are permanently banned from (1) advertising, marketing, promoting, offering, providing, arranging for, or attempting to collect payment or other consideration in connection with any merchant cash advance and (2) making misrepresentations and engaging in further violations of the Gramm-Leach-Bliley Act. 

Moreover, the defendants must vacate any judgments against former customers and release any liens against customers’ property. Finally, the defendants have been ordered to pay a $675,000 monetary judgment; the order is pending approval by a District Court judge.

“[The] order makes clear that preying on small businesses will come with a heavy price,” said Samuel Levine, the Director of the FTC’s Bureau of Consumer Protection. “These defendants have been banned from the merchant cash advance business, and we intend to hold their co-defendants similarly accountable.”

The case against the other defendants, RCG Advances, LLC and its owners. is ongoing; the proposed order requires RAM and its owner to cooperate with the Commission in that matter. 

Why This Matters

The FTC has been stepping up its scrutiny of MCA providers. The enforcement action against RAM follows an April 2021 settlement with Yellowstone Capital and its founder for alleged unfair and deceptive practices in violation of the FTC Act. While the outcome of the FTC’s investigation against RCG Advances remains to be seen, the crackdown on unscrupulous MCA providers is likely to continue. 

In the meantime, if your business is struggling under the terms of a merchant cash advance, you have options. By contacting and working with an experienced debt relief specialist, you may be able to reconcile your merchant cash advance, restructure the payment plan, and avoid an event of default. 

couple receiving merchant cash advance

How to Reconcile a Merchant Cash Advance

A merchant cash advance (MCA) provides a business with working capital that can be used in a variety of ways. Defaulting on the repayment puts both your business and personal assets at risk, however, and may force you to file for bankruptcy. Let’s take a look at how you can reconcile a merchant cash advance.

What happens if I default on a merchant cash advance?

Defaulting on an advance can have lasting repercussions. MCA agreements typically require you to sign a Confession of Judgment whereby you accept liability for the advance and waive any defenses if you default. In this situation, the MCA provider can quickly file a judgment with the court and begin seizing your business assets. 

In addition, most funders will require you to sign a personal guarantee, which means your personal assets — home, car, bank accounts – can also be seized. Ultimately, defaulting on a merchant cash advance could result in both a business and personal bankruptcy, and the business you’ve worked so hard to create will close. 

There Are Ways to Avoid Defaulting on a Merchant Cash Advance

The best way to avoid defaulting on a merchant cash advance is to ensure the repayment plan is aligned with the revenue cycle of your business. Because the funder will take a percentage of your credit or debit sales as repayment, it is crucial to make this percentage manageable. 

If you miss payments, you will be charged fees which will be added to the total amount of the advance.  in the long run. Also, if the percentage is too high, you will not be able to cover your other business expenses. 

It is also important to remember that a merchant cash advance is based on a factor rate, usually in the range of 1.2 to 1.5. This is not the same as an interest rate or an annual percentage rate (APR). Converting a factor rate into an APR can lead to a figure in the triple digits, which is an exorbitant cost of funding that can make it difficult to repay the advance.

How can I reconcile a merchant cash advance?

A properly structured MCA agreement will include a reconciliation clause that requires the funder to restructure the repayment plan if you experience a revenue shortfall. However, you must notify the MCA provider of any receivables shortfall, request a new repayment plan, and show how your business will return to profitability. 

The best way to reconcile your merchant cash advance is to contact and work with an experienced debt relief specialist who can negotiate with the MCA provider on your behalf, help you avoid defaulting, and prevent your business from being liquidated.

Exchange of financial documents

What Is a Business Debt Consolidation Loan?

Business owners face numerous challenges, such as revenue shortfalls that can make it difficult to cover expenses and pay business debts. While some small businesses turn to merchant cash advances, a better option may be a debt consolidation loan. In short, a consolidation loan may help you pay off your small business debt by allowing you to move or “consolidate” your debts under one loan.

What Are the Benefits of a Debt Consolidation Loan?

Potential benefits of consolidating business debts include:

  • A lower interest rate – A debt consolidation loan may have a lower interest rate, provided that you meet the credit criteria. This will lower the total amount paid over time and lead to significant savings. 
  • Streamlined payments – Consolidating business debts into one loan allows you to streamline multiple payments into one monthly payment. This can help your business monitor payments more efficiently and avoid late payments.
  • Improved credit score – Consolidating your business debt and staying current on your payments will help to raise your business credit score. Lowering your debt utilization and improving your payment history are key factors in your credit rating.

There are cons to consolidating your business debt, however, including:

  • Total debt is not reduced – It is important to note that a debt consolidation loan does not eliminate any debt but merely moves it into a new loan; any saving depends on your ability to secure a lower interest rate.
  • Not a long-term solution – A consolidation loan is only a short-term solution. If you fail to address your cash flow problems, you will likely encounter the same debt problems in the future. 
  • Paying more overtime – By consolidating your business debts into one loan, you will start a new loan term, which may be longer than the term of the existing loans. Not only will it take you longer to pay off your debt, but you may also end up paying more in interest over time, even if your interest rate is lower.

Alternatives to Business Debt Consolidation

If a business consolidation loan is not a workable solution to your debt problems, there are other options, including:

  • Refinancing – Refinancing differs from a consolidation loan in that you only refinance a single loan, while consolidation involves combining multiple loans. Refinancing may be a better option if you are only delinquent on one loan or you qualify for a significantly lower interest rate.
  • Debt settlement – Business debt settlement involves renegotiating your debts with creditors to pay less than you owe. However, the portion of the canceled debt is considered taxable income by the IRS. 

The Takeaway

Whether you are struggling to pay your business debts or meet the payment terms of a merchant cash advance, both your business and personal assets may be at risk. By contacting and working with an experienced debt-relief specialist, you can determine whether a business debt consolidation loan is the right option for you. 

man reviewing confession of judgment

How Can My Startup Obtain Working Capital?

Starting a business can be exciting and lucrative as long as you have funding to kickstart your business. One way to obtain working capital is by taking a merchant cash advance. Unlike a traditional business loan, you don’t need an established business history or even good credit to obtain an MCA, but there are risks. 

What Is a Merchant Cash Advance?

The first thing to know is that a merchant cash advance is not a loan, but the purchase and sale of future receivables in exchange for lump-sum cash upfront. For a startup, an MCA can provide working capital for all types of business needs, such as: 

  • Purchasing inventory
  • Obtaining equipment
  • Meeting payroll
  • Paying unplanned business expenses

But an MCA is only right for your startup if you have strong daily sales. The MCA provider will make an advance your business a lump sum payment in return for a percentage of your future debit and credit card sales through daily ACH payments. That percentage is based on:

  • The advance amount
  • The payment term 
  • Prior monthly sales

Be forewarned that the cost of funding is typically much higher than a bank loan or line of credit. An MCA is not tied to an interest rate or Annual Percentage Rate (APR), but rather a factor rate that is multiplied against the advanced funds. Factor rates range from 1.2 to 1.5, but these values are misleading. For example, if the advance amount is $50, 000 with a 1.2 factor, the amount you repay is $60, 0000 ($50,000 x 1.2). 

Ultimately, the cost of funding is determined by a combination of the factor rate and the term of the advance. If the payback period is three months, that is a very high cost of funding if it is calculated on an annual basis, resulting in an APR in the triple-digits. 

What If My Startup Defaults on a Merchant Cash Advance?

If your startup does not meet its sales projections and defaults on an MCA, both your business and personal assets will be at risk. A merchant cash agreement typically includes onerous provisions such as a Confession of Judgment whereby you accept liability for the advance and waive any legal defenses. In the event of default, the funder can automatically file a judgment in court and levy your business assets. Also, the MCA provider will likely require you to sign a personal guarantee, which means your home, bank accounts, and other personal assets will be at risk. 

The Takeaway

A merchant cash advance is one way to fund your startup, but it is crucial to weigh the risks and rewards. Whether you are considering an MCA or you have taken one and cannot be the repayment terms, it is wise to consult with an experienced merchant cash advance attorney.

Exchange of financial documents

Weighing the Risks of Merchant Cash Advances

Small businesses that lack access to traditional sources of financing such as business loans can benefit from alternative funding products like a merchant cash advance (MCA). There are several risks to merchant cash advances, not the least of which is an event of default that could result in the business closing. 

If you need assistance with a merchant cash advance, talk to a merchant cash advance lawyer about your options. In the meantime, let’s take a look at the risks of merchant cash advances.

What You Need to Know About Merchant Cash Advances

A merchant cash advance provides a small business with working capital to finance various initiatives, from paying for inventory to expanding the business. On the other hand, there are disadvantages to this alternative funding product.

MCAs Are Not Regulated

A merchant cash advance agreement is a purchase and sale agreement, not a loan. As such, MCAs are not strictly regulated at the federal or state level. While there are disclosure requirements for MCA transactions in states like New York, MCA providers have control over repayment terms and rates, putting business owners at a disadvantage. 

MCAs Are Costly 

Merchant cash advances are not based on an interest rate associated with a loan, but rather a factor rate which is expressed in a decimal figure, typically between 1.2 and 1.5. When the factor rate is converted in an APR (annual percentage rate), however, the figure can rise to the triple digits, which is an exorbitant cost of funding. But merchant cash advances are not governed by state usury laws. 

Short Repayment Terms

MCA repayments may involve daily deductions over terms ranging from 90 days to 18 months, but MCA providers typically require shorter repayment terms (6-to-9 months), which is not beneficial for businesses seeking the maximum repayment period. 

Restrictions on Business Operations

Businesses that take MCAs are required to agree to restrictions on business operations. In particular, they may be prohibited from encouraging customers to pay with cash by offering discounts or taking other business loans while the advance is outstanding. 

The Takeaway

Ultimately, repaying a merchant cash advance can have an adverse impact on cash flows, which poses a significant problem if there is a downturn in business. By defaulting on an MCA agreement, both your business and personal assets are at risk of being seized. 

If you are dealing with this situation, contact ReconcileMyMCA.com today. A properly structured MCA contract will include a reconciliation clause that requires the funder to restructure the repayment plan under certain conditions. Our team will work to find a negotiated resolution and protect the business you’ve worked so hard to build. 

MCA holdback

In Focus: MCA Holdbacks

Is your small business considering a merchant cash advance (MCA)? If so, it is crucial to understand the term holdback amount and how it differs from the interest rate. In the event of a downturn in business, you may default on the MCA agreement, placing both your business and personal assets at risk. Let’s take a look at how a “holdback” impacts the repayment of a merchant cash advance

MCA Credit Criteria

MCA providers rely on different criteria than banks and other lenders that look to your credit score, among other factors. Alternative funders focus on your daily credit receipts to assess whether your business can repay the advance. 

Ultimately, the cost of an MCA is higher than other financing options. In particular, the repayment terms of a cash advance differ greatly from a traditional bank loan. The main difference is the so-called “holdback” or holdback amount. This is the percentage of daily credit card sales the funder will apply to repay the advance. 

The holdback percentage can range from 10 to 20 percent until the advance is paid off, and a holdback is not the same as an interest rate. In the grand scheme of things, the more debit and credit card transactions your business does, the faster you’ll be able to repay the advance.

Holdback Amount v. Interest Rate

The difference between the holdback and interest rate you’re being charged for the advance is noteworthy. 

The interest rate is based on a factor rate, usually between 1.2 and 1.5. Unlike a traditional term loan, the factor rate is not amortized over the term of the advance. When that rate is expressed as an annual percentage rate, however, the actual rate may range from 60 to 200 percent.

The holdback is the daily draw from your merchant account until the advance, plus interest is paid in full. In short, the interest rate is the cost of the advance and the holdback amount is a percentage of your daily receipts.  

For example, if you take a $10,000 MCA at a factor rate of 1.2 ($10,000 x 1.2 = $12,000) the cost of the financing would be $2,000. If the holdback percentage was 10 percent and $2,000 was deposited into your merchant account today, your daily payment would be $200.

Why This Matters

An MCA does provide a business with ready access to working capital, but the costs are high. It is critical to understand the holdback and factor rate, and how the payment will affect your cash flow. 

In the end, repaying a merchant cash advance requires having a consistent flow of daily debit card and credit card receipts. If there is a business downturn, you may experience a receivables shortfall and default on the cash advance. For this reason, it is wise to consult with an experienced merchant cash advance attorney if you need assistance with an MCA or any other type of business funding.

business owner reviewing MCA

Merchant Cash Advances and UCC-1 Lien Notice Filings

When you obtain a merchant cash advance (MCA), the funder will typically prepare and record a UCC-1 filing, creating a lien against the business entity and certain assets (e.g. equipment, vehicles, property). If your business defaults on the cash advance, both your assets and business relationships may be in jeopardy. Here’s how

What is a UCC-1 Filing?

A UCC filing (or UCC lien or UCC-1) is a financing statement that lenders and alternative funders file with the state which places a lien on the named assets to secure a loan or cash advance. UCC-1s are common when you receive any type of business loan or financing.

Generally, there are 2 types of UCC lien

  • Specific collateral lien uses a single asset as collateral (e.g. a piece of equipment utilized by the business)
  • Blanket lien covers many different assets, all of which can be used to settle a debt

The language and the pledged security listed on a specific collateral lien statement can vary, however, MCA companies place a lien against a business’s future receivables by using a blanket UCC lien. Doing so creates a lien against the business assets, including:

  • Property
  • Equipment
  • Inventory
  • Vehicles
  • Receivables
  • Chattel
  • Accounts
  • Letters of credit
  • Securities

Before you agree to the terms of an MCA agreement, which may also involve signing a personal guarantee, it is wise to consult with an experienced MCA attorney. 

How a UCC Filing Impacts Your Business

UCC liens are commonplace in business financing; however, an existing UCC-1 filing may increase your company’s credit risk because it demonstrates that

  1. Your business already owes money to another lender or funder
  2. Your business assets have been pledged elsewhere

When it comes to a merchant cash advance, if your business defaults on the MCA agreement, the funder will likely send the UCC liens to your vendors and/or customers demanding that they pay the funder directly rather than paying your business because the MCA provider purchased your future receivables. This can cause serious harm to your existing business relationships. 

At the same time, funders also rely on a personal guarantee and a Confession of Judgment to seize personal and business assets in the event of default. If your business is struggling under the terms of an MCA agreement, it is wise to consult with an experienced merchant cash advance attorney to protect your interests. 

How ReconcileMyMCA.com Can Help

If you have received an MCA and a lien has been placed against the business, our experienced debt relief specialists and MCA attorneys can determine whether:

  • The MCA provider clearly defined what collateral has been pledged
  • The funder accurately claimed the correct dollar amount of the pledged collateral
  • The collateral is noted with specificity
  • The filing reflects the terms of the MCA agreement

At ReconcileMyMCA.com, we regularly assist clients with resolving UCC-1 liens and reconciling their merchant cash advances. Contact our office today by completing the convenient intake form to get started.

merchant cash advance for small business

Is a Merchant Cash Advance Right for My Small Business?

If your small to mid-sized business needs working capital but lacks access to traditional sources of financing (e.g. business loan), a merchant cash advance (MCA) may be an option. This alternative funding product is not a loan, however, generally unregulated, and typically comes with strict repayment terms that could easily result in a default

Ultimately, failing to pay back an MCA could lead to the collapse of a company or liquidation bankruptcy. If your business needs assistance with a merchant cash advance, talk to an experienced debt relief specialist. In the meantime, let’s take a look at the types of small businesses that typically benefit from merchant cash advances

Reasons to Consider a Merchant Cash Advance

Many small businesses, in need of working capital, primarily turn to alternative fundings such as merchant cash advances for:

  • Marketing and advertising
  • Covering cash flow (receivables) shortages
  • Paying unforeseen business expenses

Moreover, all types of businesses tap the MCA market, including:

  • Retail stores require working capital in the contemporary landscape as shoppers move online. An MCA allows a retailer to manage inventory, reorganize the floorplan to boost sales, and set up new stores to grow the business. 
  • Restaurants face stiff competition and razor-thin margins, which makes working capital essential for purchasing new equipment and establishing franchises.
  • Beauty salons offer more than hairstyles today, often include skincare,  massage, and spa services, which make merchant cash advances necessary for purchasing new materials and equipment and modernizing the space.
  • Auto repair shops must stay current in order to service contemporary tech-loaded vehicles by purchasing new diagnostic equipment and restocking parts and supplies with funding through an MCA. 
  • Florists need to deal with the cyclical nature of the business (e.g. seasonal/holidays) as well as stiff competition from national retailers which makes an MCA crucial or covering expenses when business is slow.

What happens if my business cannot repay an MCA?

A merchant cash advance is typically sought by startups and small businesses that cannot tap traditional loans, whether because of poor credit or limited time in business. An MCA is not a loan, however, but rather the purchase of future receivables in exchange for a lumpsum payment. Because it is a sales transaction, however, an MCA does not fall under traditional lending laws.

This gives funders an unfair advantage because they typically rely on onerous terms such as a Confession of Judgment and a personal guarantee which can jeopardize both the business and personal assets. If you default on an MCA agreement, the funder can quickly move to levy bank accounts and personal property. 

At the same time, a properly structured agreement will include a reconciliation clause that requires the MCA provider to restructure the payment plan if your sales do not meet the projected target, as long as you meet certain conditions. First, you must notify the funder of the receivables shortfall and request the advance to be reconciled. Further, you must provide evidence that your business will return to profitability. 

This is where ReconcileMyMCA.com comes in. We regularly assist businesses with reconciling their cash advances. If your business is struggling to meet the terms of an MCA agreement, contact our office today by completing the convenient intake form.

yes lender

Yes Lender Raises MCA Stake With Tech Acquisition

Yes Lender recently announced the acquisition of FinTech startup Edge Funder. The alternative finance lender said the deal would give it an edge in funding small businesses. However, the transaction is also a reflection of the consolidation in the merchant cash advance (MCA) marketplace. 

Whether Yes Lender will be able to capitalize on Edge Funder’s direct-to-merchant portal remains to be seen. The impact of the transaction on the MCA marketplace is also unclear at this juncture. In the meantime, if your business needs assistance with reconciling a merchant cash advance, talk to an experienced debt relief specialist. 

Yes Lender’s Acquisition of Edge Funder

In a news release, Yes Lender said the acquisition gives the company‘s customers access to Edge Funding’s direct-to-merchant portal and strengthens its position in the merchant cash advance sector.

“Powered by artificial intelligence and proprietary software, the portal presents multiple funding options to merchants within 60 seconds,” the release said. 

Yes Lender will also be able to tap Edge Funder’s broad marketing expertise in web visibility and generating quality leads of merchants seeking working capital. Yes Lender CEO Glenn Foreman reportedly said Edge Funder’s lead generation and direct-to-merchant platform complement the funder’s sales funnel, while AI will enhance its underwriting. 

The merger is intended to “create an ecosystem that benefits our small business customers, our business partners, our employees, and our investors, and to do so in a highly ethical way,” Edge co-founder and CEO Amoz Segal said in a statement.

The acquisition comes at a time when small business lending is increasingly being driven by innovation, with emerging opportunities to access data across multiple service providers. Many observers agree that data transparency will be a critical component to accelerating small to midsized business financing efforts going forward. 

The Takeaway

Yes Lender’s acquisition of Edge Funder highlights the further expansion of artificial intelligence in the FinServ space. Merchants are likely to see aggressive data[-driven organic and paid web marketing and direct-email campaigns 

Though small businesses are still only beginning to recover from the pandemic, there is plenty of capital on the sidelines, much of which will be pipelined through merchant cash advances and other alternative funding products via AI and other tech-based outreach efforts. The best way to protect your small business during these unprecedented and evolving times is to consult with the experienced debt relief specialists and MCA attorneys at ReconcileMyMCA.com